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Attachment A - Report on Electricity Reform

Council of Australian Governments Communiqué
19 August 1994

In relation to the reform of the electricity industry, relevant Heads of Government:

1. Noted the progress which has been made since the 25 February 1994 Council meeting including:
1. substantial progress in structural reform to achieve a competitive market:-
• in Victoria a competitive market will apply from October 1994 with five distribution organisations, a grid company, a wholesale market company and a generation holding company under which individual generators will act independently;
• in New South Wales a transmission company was established in July 1994 as a subsidiary to Pacific Power and a wholly independent transmission organisation is expected to be established in early 1995. It is intended to carry out a review of the structure of generation in New South Wales prior to July 1995;
• in Queensland the generation sector is to be separated from transmission and distribution in early 1995. The transmission and distribution functions are to rest with legally separate subsidiaries. It is intended that there will be scope for competition in generation, including from new entrants, subject only to technical licensing requirements; and
• reviews of the State electricity industries in both Tasmania and South Australia are now under way with a view to structural reform consistent with the national model;
2. in relation to National Grid Management Council (NGMC) activities:-
• the successful completion of the market trial on 30 June 1994;
• increased involvement in the reform process for distributors, major customers and other key stake-holders through membership of a high-level steering group and associated working groups;
• the proposed provision by Governments of additional resources ($7million in 1994-95) and tighter project management arrangements with the appointment of a full-time General Manager; and
• the agreement to take full advantage of current reform implementation experience in developing national market arrangements;
3. good progress towards agreement between the Commonwealth, New South Wales and Victoria on key principles for the corporatisation of the Snowy scheme from 1 July 1995 and its introduction as a key source of competitive generation in the interstate electricity market; and
4. commencement in June 1994 of the public consultation phase on the Eastlink project with a commitment by Queensland and New South Wales to an even-handed evaluation of the economics of the project as a means of future electricity supply.
2. Agreed in response to an NGMC Report on progress in the development of market arrangements that:-
1. the interim market trading and pool arrangements from 1 July 1995 within and between States should be consistent and standardised to the extent necessary to ensure that retailers and eligible customers can freely trade with generators throughout the interconnected system, but recognising the different stages of reform which may exist in each jurisdiction at that time;
2. the main objectives of the fully competitive national market operating from 1 July 1999 are:-
1. the ability for customers to choose which supplier, including generators, retailers and traders, they will trade with;
2. non-discriminatory access to the interconnected transmission and distribution network;
3. no discriminatory legislative or regulatory barriers to entry for new participants in generation or retail supply; and
4. no discriminatory legislative or regulatory barriers to interstate and/or intrastate trade;
3. transition arrangements are to be developed on the basis of the earliest practicable achievement of each of the objectives of the fully competitive market;
4. by October 1994 the NGMC should prepare a report for early decision by Heads of Government on the interim national market arrangements to apply from 1 July 1995 and by November 1994, a report on the arrangements for integrated system control to support that market; and
5. the relevant jurisdictions would make decisions by the end of 1994, or as soon as practicable thereafter, on the other elements essential to the establishment of a national market including industry structure, legislative arrangements, Snowy reform and the Interconnection Operating Agreement which currently governs electricity trade between the interconnected States.
3. Consistent with the agreement at Council’s February 1994 meeting that the principles relating to recovery of the fixed cost component of network pricing would encompass common asset valuation methodologies and rates of return as well as cost reflective and uniform pricing methodologies, agreed:-
1. in relation to the fixed cost component of network pricing that:
1. network prices should be determined according to a common method throughout the national electricity market;
2. network charges for EHV transmission networks and lower voltage sub-transmission networks should in principle be cost reflective ensuring that both franchised and non-franchised customers and generators are charged, on a consistent basis, in accord with their use of network assets, and taking into account the impact of network constraints;
3. in view of the complexity of calculating the value of network services used by individual small customers and householders, distribution system pricing could be calculated using a greater degree of averaging than that required for the EHV and sub-transmission networks;
4. further detailed work should be carried out by the NGMC to determine the extent of charges that should be applied to existing and new generators;
5. further work should be carried out by the NGMC in conjunction with the development of the energy market to ensure appropriate treatment of interconnections including commercial incentives for the development of new interconnectors;
6. within distribution, the retail and network functions should be ringfenced and separately accounted for; and
7. prices for high voltage and distribution networks should be transparent and published;
2. for the purposes of developing network pricing and access charges, the methodology for asset valuation should be consistent with the National Performance Monitoring sub-committee report and with Australian Accounting Standards, and:
1. that Deprival Value should be adopted as the preferred approach to valuing network assets;
2. that the approaches adopted for applying Deprival Value should be transparent and uniform across jurisdictions to avoid distortions to competition; and
3. that by 31 December 1994 the NGMC establish a set of agreed transparent and non-discriminatory methods and principles for applying Deprival Value.
4. Agreed in relation to customer market thresholds that:-
1. the move to a competitive electricity market by 1 July 1999 include an agreed timetable for the progressive reduction in the threshold level for competitive customers;
2. at the commencement of the transition phase on 1 July 1995, competitive access be allowed by each State at least for customers of 10MW; and
3. (the NGMC report back to the Council's February 1995 meeting on both the timetable to reduce competitive customer thresholds over the transition period and the arrangements that should apply from 1 July 1999.
5. Agreed that current working arrangements between the NGMC and Senior Officials are appropriate to carry through the reform process to 1 July 1995.
6. Requested the Senior Officials' Working Group, working in collaboration with the NGMC and State and Territory Treasuries, to report back to Heads of Government by the end of 1994 on the timing and maturity profile of vesting contracts between generators and distributors over the transition to a fully competitive electricity market by no later than 1 July 1999 taking into account State financial/budgetary impacts (i.e. generator values, debt servicing capacity, scope for tariff reform, etc) and the reduction in the customer market thresholds.

 

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