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Client Update: Governance of energy market fundamentally sound, but with potential for improvement

30 October 2015

In brief: The final report of the Review of Governance Arrangements for Australian Energy Markets has made a number of recommendations to improve the effectiveness and efficiency of each governing body in the Australian energy market, while concluding that the governance arrangements are fundamentally sound. Partner and Government Sector Leader Paul Kenny (view CV) and Associate Monique Donato report.

COAG Energy Council

The final report of the Review of Governance Arrangements for Australian Energy Markets found that the COAG Energy Council (Council) and its Senior Committee of Officials (SCO) were not sufficiently focused on strategic direction and that, as a result, they were not providing active leadership in all areas of energy policy. One of the report's recommendations includes making the SCO responsible for providing advice to the Council on strategic direction, with the SCO's advice to be based on expert advice to be provided by the Australian Energy Market Commission (AEMC). The report also notes that the processes for developing strategic direction should be made more transparent to stakeholders.

The report found that one of the themes that emerged from stakeholder consultation was the need to better manage the ability for individual jurisdictions to obtain derogations, as jurisdictions that resist ceding responsibilities to the national framework undermine one of the Council's key objectives of a nationally consistent framework. Against this background, the report recommends that jurisdictional derogations to rules be permitted initially only if the derogation is targeted and time-limited, with a maximum duration of three years. When a derogation is reviewed, the report recommends that a more stringent 'necessity principle' be applied, particularly given that by the time of the review there will be more certainty about the impact of a rule change on the particular jurisdiction.

AEMC

The report considers the AEMC's role as rule maker and advisor to the Council to be increasingly important and recommends this role be reinforced through specifically requiring the AEMC to prepare a major policy report every three years on strategic direction, policy priorities and work program. Such a report would also include a comprehensive review of the rules as a whole.

The report made a number of recommendations in response to stakeholder comments calling for an increase in the AEMC's accountability and the timeliness of the AEMC's processes, including:

  • that the AEMC implement mechanisms for prioritising rule change proposals and terminating rule change processes that are underway but no longer necessary;
  • that the existing expedited rule change process for less complex rule changes be amended to allow for an increased timeframe range of six to eight weeks, so that the AEMC is more likely to use the process; and
  • that the AEMC implement a 'start-the-clock' provision upon receipt of a rule change request to improve accountability (as many stakeholders expressed frustration with not knowing AEMC time frames for rule changes and reviews), but that the AEMC still retain the ability to extend timeframes.

AER

One of the key recommendations emerging from the report was that the Australian Energy Regulator's (AER) performance could be strengthened by establishing it as an independent organisation and separating it from the Australian Competition and Consumer Commission (ACCC).

This recommendation was made on the basis of the panel's view that the AER Board lacked autonomy over the organisation and full independence in decision-making. Reasons given by stakeholders for retaining the current organisational structure, such as efficiency and synergies in human resources and shared services, were not substantiated and, in any event, the report considered that they did not justify retaining the current structure. For example, the report noted that there would be no barrier to the ACCC and the AER sharing resources and services if they were independent organisations.

Other recommendations included retaining the scope of the AER's responsibilities as they are and having the AER's performance reviewed every three to five years by a panel of experts appointed by the Council, with the latter recommendation arising from stakeholder disquiet with the outcomes of past price reviews and the AER's own recognition of the need for improvement.

AEMO

The report concludes that the Australian Energy Market Operator (AEMO) is performing its functions well, but that there is room to improve the clarity of AEMO's role. To address a lack of consensus about the extent to which AEMO should be involved in policy or market development, the report recommends clarifying AEMO's role as facilitating the operation and promoting the reliability of energy markets. The report states that AEMO's central focus should be on operations and developing procedures for the purpose of market operations. The report does not suggest that AEMO should not be involved in more general market development, but recommends rather that all activities to be undertaken by AEMO outside its core role should be provided through specific commissions by the Council or AEMC, or on a contractual basis with other parties.

The report states that AEMO should remain a not-for-profit company and did not recommend any change to AEMO's ownership structure (which is currently a combined ownership of government members, who hold 60 per cent of voting rights, and industry members, who hold 40 per cent).

Institutional funding and personnel

The report notes that the AEMC is funded by contributions from state and territory jurisdictions on a per capita basis, while the AER is funded by the Australian Government. The report recommends that the funding arrangements for the AER and the AEMC should align with the principle that funding responsibility should rest with those who determine the resource requirements or workload of the relevant body. Given that the AER and AEMC's workloads are largely driven by state and territory jurisdictions, and given the belief that governance design should reflect a greater national character, the report recommends that both the AEMC and the AER should be funded by all jurisdictions that are members of the Council (including the Australian Government) in a manner determined by the Council.

AEMO is currently funded through cost recovery from participants. The report did not recommend any changes to AEMO's funding arrangements, noting that they were consistent with AEMO's role as system and market operator.

The report found that there was scope to increase the number of commissioners for both the AER and the AEMC, given the increased scope of both of their respective functions envisaged by the report. It also recommended some changes to the appointment process of commissioners.

Future reviews and next steps

Finally, the report recommends that the Council should assess whether there is a need for another energy governance review in 2023.

The Council is expected to publish its response to the Report in December this year.

For further information, please contact:

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