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Client Update: Move to national regulation delayed

14 November 2016

In brief: As part of the Western Australian Government's electricity market review, legislation was introduced recently into Parliament for Western Australia to participate for the first time in the National Electricity Law from 1 July 2018. However, the Public Utilities Office has confirmed speculation that time has run out for those reforms to be enacted ahead of the election in March 2017. Partner Jodi Reinmuth (view CV) and Lawyer Alex Ninkov give an overview of the proposed reforms and next steps. 

Background

In March 2014, the Western Australian Government launched the electricity market review (the Review) to examine the regulation of the electricity generation, wholesale and retail sector within the South West Interconnected System (SWIS). The Review was to propose ways in which to drive efficiency and reduce costs and to set up the SWIS to be able to adapt and embrace changes in technology and network demand.

Western Australia has its own scheme for regulating the SWIS, and currently it does not participate in the National Electricity Law (NEL) or the National Electricity Rules (NER). The Public Utilities Office in its release of 11 November 2016, summarised the rationale for the transition to the national regime as follows:

Transferring electricity network regulation to the national framework will enable Western Australia to take advantage of developments that have already occurred under the national regulatory framework in dealing with many of the challenges emerging in the South West Interconnected System.

In terms of the objectives of the reforms, network control and pricing for the Western Power network were to shift from the Economic Regulation Authority (ERA) (a Western Australian body) to the national regulator, the Australian Energy Regulator (AER). The AER was scheduled to take over approving Western Power's access arrangements (which sets revenue and access terms) from 1 July 2018 with transitional arrangements applying from 31 December 2016. Only certain parts of the NER were proposed to apply to the SWIS, including those relevant to registration and connection.

The legislation, which was scheduled to be enacted by the end of this year, appears to have been delayed until after the March 2017 State election (see Review announcement). It is presently unclear if the legislation would be reintroduced in the same form.

In the meantime, the WA Minister for Energy is proposing amendments to the Electricity Networks Access Code 2004 (the Code). Industry participants had been operating on the assumption that the reforms would be adopted, and that transitional arrangements would apply from December 2016. As a consequence, certain time frames in the Code need now to be extended to give Western Power an additional nine months to prepare its proposal, extending the date from 31 December 2016 to 2 October 2017. The amendments also set the next 'target revisions commencement date' as 1 July 2020 with a view to preparing for the transition to the NEL.

The Public Utilities Office has issued a consultation paper on those proposed Code amendments, which is open for comment until 12 December 2016.

Proposed reforms

The legislative package comprises three bills: the Energy Legislation Amendment and Repeal Bill 2016 (ELAR Bill), the National Electricity (Western Australia) Bill 2016 (NEWA Bill) and the National Gas Access (WA) Amendment Bill 2016. The combined impact is as follows:

  • responsibility for network control, regulating access and pricing in relation to Western Power's electricity networks in the SWIS and gas pipelines in Western Australia moving from the local ERA to the AER under the NEL and the National Gas Law (the ERA will retain control of compliance and enforcement);
  • the establishment of temporary 'gap year' regulatory arrangements that would have applied to Western Power's network from 1 July 2017 to 30 June 2018 will now not be achieved under the original timeline;
  • generators in the SWIS having 'constrained access' to the network; and
  • Western Power being granted an immunity for any potential exposures it may have to generators under existing network access contracts that include terms which have been interpreted as providing for 'unconstrained access' to the network.

Shift from 'unconstrained' to 'constrained' network access and consequences

One key consequence of adopting the connection aspects of the NER is the altered levels of network access, and the potentially significant effect this may have on underlying network access contracts that generators have with Western Power. Generators, which previously accessed the SWIS on an 'unconstrained' basis, would only be entitled to 'constrained' network access. This is a uniquely Western Australian issue, given that a constrained access model had generally been adopted in east coast electricity markets as those markets developed. Currently, some generators pay for 'firm' network access rights, meaning they are free to dispatch (sell into the grid) electricity whenever market conditions suit them. This is known as 'unconstrained access', and was the central underpinning of the open access to the electricity market for more than a 20-year period.

By implementing a 'constrained access' model, generators which were previously able to obtain significant value through their ability to supply into the network during times of peak demand may not be able to do so at times where part of the network is constrained. In practical terms, a possible consequence may be that Western Power would be contractually liable to existing generators who lose their unconstrained access rights (this risk was acknowledged in Western Power's October 2014 submission to the Review). As a result, the ELAR Bill contained a provision which statutorily inserts a contractual term into all access agreements made before 1 July 2018. That term has the effect that Western Power cannot be liable for any loss (direct or indirect) incurred by those generators associated with the change. This gives Western Power effective immunity.

This will be an issue if, in regrouping, there is a desire to implement a constrained access model without enabling legislation. If there is no legislative basis for making the change, bilateral renegotiation of access agreements may be required.

The shift to constrained access makes access to Western Power's network consistent with the national framework. It also is expected to facilitate more efficient and cost effective connections to the existing network and to reduce interconnection and access costs for incoming generators.

Next steps

The consequences of this delay could be significant for industry. Some of the ERA's regulatory functions were to transition to the AER on 1 July 2018. The AER could not do this unless it had the relevant statutory authority to prepare its systems and to commence the regulatory determination process for Western Power's access arrangements in late 2016. The delay may mean the transfer of this function will not occur until the next determination which is set to occur in 2021.

It may be that the reforms to the reserve capacity mechanism, and the broader reforms to the Wholesale Electricity Market Rules, will be made independently of the status of the reform bills. This may go some way to improving market efficiency. It is also possible that in the future, the constrained network access model will implemented under Western Australian legal instruments as an alternative to the formal adoption of the NER. This will be a policy decision to be determined by the incoming government in conjunction with the Review's Steering Committee, likely to occur mid next year. As a result, electricity regulation in Western Australia could be left in a state of flux well into the foreseeable future.

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