Statutes Amendment (National Energy Laws) (Binding Rate of Return Instrument) Bill

Second Reading

Adjourned debate on second reading.

(Continued from 2 August 2018.)

The Hon. A. KOUTSANTONIS (West Torrens) (17:17): I can inform the house that I am the opposition's lead speaker on this issue and the only speaker, I imagine, on this issue, unless there is some great urgent need. For clarification, this is the binding rate of return instrument bill. I am advised by the government that this bill seeks to amend the National Electricity Law and the National Gas Law to establish a single rate of return. The instrument will apply across all determinations made by the Australian Energy Regulator.

It seems like a very sensible reform. Inspired decision-making has come up with a better way of the Australian Energy Regulator coming up with, I think, a sensible solution to decrease the regulatory burden on businesses and consumers because there is a burdensome cost of regulation. Energy ministers, I am advised, considered this an important step in stabilising energy prices over time because the rate of return makes up the largest revenue component of the revenue of network businesses. It is a very good business to be in if you can get a regulated return. Part of the problem, of course, when it comes to electricity pricing is that the consumer bears almost all the responsibility and all the risk. It is a very difficult task for the Australian Energy Regulator to regulate these businesses.

One of my great regrets as energy minister was not seeing the formal separation of the Australian Energy Regulator from the Department of Treasury and Finance and the ACCC in Canberra become a stand-alone independent regulator, much like our ESCOSA here in South Australia or other regulatory bodies where the industry pays to be independently regulated. Unfortunately, in this case the Australian Energy Regulator is simply an arm of government, and I have never thought that is the best way to regulate an industry as complex and difficult to regulate as the energy sector.

I am advised by the government that the bill also improves consultation requirements, making the AER's decision-making process more transparent—as transparent as you can make any regulatory decision-making process. In my own personal experience, regulatory bodies and their determinations are the most opaque of any organisation, especially the way in which they come to their determinations. It is a very litigious area. I commend minister Frydenberg and my former colleagues in the COAG Energy Council for making some changes, which were supported by Labor both in the federal parliament and of course here.

I am also advised that a consumer reference group will be established to advise the AER on implementing the consumer consultation process and to facilitate consumer input into the design of the instrument. Another independent expert panel will also be established. You can never have enough independent expert panels to advise an independent regulator. Their job would be to review the draft instrument, ensuring that the AER's decision is based on sound reasoning.

The bill will require the AER to review and replace the instrument every four years. Given that South Australia is the lead jurisdiction responsible for passing the legislation on behalf of all member states, the energy minister on behalf of the COAG Energy Council has taken carriage of the bill. There is a very fine tradition in this parliament and, given that this is a national reform, it would be a very rare occasion that the government and the opposition would not agree to pass this measure, regardless of any personal or political opposition to said such reform. It would take, indeed, I think a very radical reform for the opposition to depart from that precedent. I have no intention thus far of departing from that precedent, and I think it is an important precedent for a number of reasons.

I am advised by the government on what is a rate of return. For the benefit of the house and those who are listening, the rate of return allows regulated electricity and gas businesses to recover their efficient financing costs, which I have always thought to be a very unique tool for these types of businesses. Most other businesses are at the risk of the market. Depending on the product that they sell, they would compete.

Of course, when you have a monopoly you can overcharge, but in Australia you cannot undercharge. The regulated return ensures that the businesses are viable and can maintain their infrastructure and invest to meet reliability standards and other requirements that they may have. This can often end in some outcomes that are unintended. I think that a lot of these reforms are attempting to undo some of the damage done during the Hilmer reports. The reform was agreed on 14 July 2017 when I was present at the COAG Energy Council. I believe that there was a cabinet decision to support this legislation.

I do not know the position of the crossbench in the upper house but I assume that there will be a speedy passage of this bill, given that both the government and opposition support it. On an aside but still on the topic of energy, I have grave concerns as we head into the summer festive season that we are faced with a dilemma in our nation's capital where there has now been a contemplation of a number of energy policies that have all been abandoned by the COAG, the ESB and the commonwealth government.

The reform process must go on, and that is why the COAG Energy Council now needs to step up and take a leadership position on these matters, a leadership position to ensure that effective energy policy is carried forward. I fear that it may be too late for the National Electricity Market for there to be any reform that could be introduced that will make a difference. What is occurring now is that the commonwealth government, given their complete absence of any carbon pricing solutions, has vacated the field. In my experience, nature abhors a vacuum, and in that vacuum I am not sure what the outcomes will be.

I do know this: without effective energy policy there will be no investment. We have seen the Institute of Company Directors now on a number of occasions—not only yesterday but last year—issue statements to directors across Australia who are on energy company boards that, if they do not take carbon into account while making investment decisions, they could be personally liable for any decisions taken by energy companies. That is why you are seeing large energy companies not making investment decisions—because of a lack of clarity around carbon pricing or carbon policy—and I have grave concerns about what that will mean. That is why reforms like this are important to continue that reform process.

Again, the decision to proceed with this was taken in July. When this decision was taken, the National Energy Guarantee was being contemplated as a potential solution and national framework for investment. That has now gone by the wayside, yet these reforms continue. It shows you how important the COAG energy ministers process is. Given the time is running close to when the government wishes to rise, I support the bill, I commend the house and I recommend that members give it universal support.

Mr PEDERICK (Hammond) (17:27): I rise to support the Statutes Amendment (National Energy Laws) (Binding Rate of Return Instrument) Bill 2018. I note that on 14 July 2017 the COAG Energy Council agreed to implement a binding rate of return instrument for the rate of return on capital of the Australian Energy Regulator (AER) and the Western Australia Economic Regulation Authority (WAERA) regulatory determinations for regulated electricity and gas network businesses. This was a matter that emerged from the COAG Energy Council review into the effectiveness of the limited merits review framework by which network businesses could challenge decisions of the regulator.

The Statutes Amendment (National Energy Laws) (Binding Rate of Return Instrument) Bill 2018 implements a binding rate of return instrument in the National Electricity Law, National Gas Law and subordinate instruments. The rate of return is the forecast of the cost of funds a network business requires to attract investment in the network. The cost of capital is a significant determinant of network charges paid by consumers and businesses. The binding instrument will provide a single industry-wide process conducted every four years by each regulator to determine the binding rate of return methodologies that will be applied to individual electricity and gas network businesses at the time of their regulatory determinations.

The AER regulates the revenue that may be earned from electricity network distribution and transmission businesses and gas distribution pipeline businesses during a regulatory period, generally over five years. The largest of the revenue components is the return on capital, which may account for up to two-thirds of the business's revenue. The return on capital is calculated by applying the rate of return to the value of the network pipeline service provider's regulatory asset base.

The rate of return is the forecast of the cost of funds a network business requires to attract investment in the network. Currently, the regulator's existing guidelines are non-binding, allowing a different approach to rate of return. Gamma is the value of imputation credits used in calculating corporate income tax costs to be adopted by the AER and the West Australian ERA when determining the revenue allowance for each individual business. This has been a matter that has been challenged by network businesses in court, often with the impact of increasing the cost to consumers.

This move to a binding rate of return investment will improve the transparency and certainty of the regulator's decisions, reduce the regulatory burden for all stakeholders and provide a more robust process for the development of the rate of return. With those few brief comments, I support the bill.

Debate adjourned on motion of Dr Harvey.

At 17:32 the house adjourned until Tuesday 6 November 2018 at 11:00.