POWER RETAIL CORPORATION BILL 2014 Explanatory Statement

Northern Territory Explanatory Statements

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POWER RETAIL CORPORATION BILL 2014

Power Retail Corporation Bill 2014

Serial 65

LEGISLATIVE ASSEMBLY OF THE NORTHERN TERRITORY

TREASURER

EXPLANATORY STATEMENT

GENERAL OUTLINE

The purpose of the legislation is to establish a new Government owned corporation, named the Power Retail Corporation, to assume the power retailing functions of the existing Power and Water Corporation (PWC).

The legislation is part of a package of reforms that provide for the structural separation of PWC’s monopoly and contestable businesses into three stand-alone Government owned corporations.

The establishment of the Power Retail Corporation will create a new corporation responsible for the power retail functions currently performed by the Power and Water Corporation.

The Purpose of Reform

The reform process is key to achieving the Government’s overriding objectives for the provision of safe, reliable, least cost electricity to Territorians.

These have been the overarching objectives of similar reforms implemented in other states since the 1990s, and currently underpin operation of the National Electricity Market.

The reform program is designed to remove inefficiencies and more effectively restrain costs and prices.

To this end, the reform program seeks to improve the competitive environment for the generation, supply and sale of electricity by establishing a range of pro-competitive measures in the Territory’s electricity supply industry.

Structural separation is essential to facilitating competition. Separation is the most effective way to give competitors confidence that they will succeed (or fail) on their own merits.

The Purpose of Structural Separation

Since the 1980s, PWC has been an integrated multi-utility government owned business performing operations that can be most efficiently supplied through a single, or monopoly, provider and a competitive market.

As such, PWC is responsible for a wide range of businesses. The main businesses are as follows:

Water and Sewerage: which involves the storage, supply and sale of water, and the collection and treatment of wastewater;

Power Networks: which involves the transmission and distribution of electricity across the system of poles and wires;

Power Retail: which involves the billing, credit control and customer interface associated with the supply of electricity;

Power Generation: which involves the generation of electricity in all major centres in the Territory;

Gas Purchasing: which involves the sourcing and aggregation of natural gas for sale to electricity generators and to other major users of gas;

Indigenous Essential Services Pty Ltd (IES): which involves the provision of electricity and water and sewerage services in remote Territory communities on a not

for

profit basis.

To date, the primary rationale for PWC’s horizontally and vertically integrated structure has been to maximise economies of scale and scope, given that this business delivers services to a relatively small population dispersed over a large geographical area.

Horizontal integration is associated with the multi

utility nature of PWC which sees it jointly undertake electricity, water and sewerage lines of business.

Vertical integration refers to the joint undertaking of upstream and downstream (related) activities within the same line of business, and is especially important with regard to PWC’s electricity business where it is involved in all stages: starting from gas sourcing, to generation, to distribution and transmission, to system control and finally to retailing to end

users.

However, PWC’s integrated structure has not always translated into clear benefits for the Territory’s electricity consumers. In fact, while offering some potential benefits, the integrated structure of PWC also directly limits incentives for PWC to operate efficiently.

The lack of financial transparency has stymied shareholder (and regulatory) monitoring.

The associated wide range of businesses has magnified the complexity facing a single board and management. Moreover, the skill set required for running monopoly businesses can be quite different to that required for contestable (or competitive) businesses.

Finally, the inevitable presence of both monopoly and competitive activities directly deters competition emerging in the Territory’s electricity supply market. Besides the considerable market power that PWC has been able to exercise by operating across all segments of the electricity supply chain, the potential exists for its monopoly activities to cross

subsidise or otherwise favour its associated or competitive activities.

Over much of the previous decade, the hope of all governments has been that adoption of corporatisation and introduction of jurisdictional regulation would see the benefits of PWC’s horizontal and vertical integration being materialised at the same time as costs were minimised through improved governance and regulation.

However, the financial and operational performance of PWC over the last decade shows that the improved governance and regulation put in place during the first decade of this century has not succeeded as well as had been hoped.

Therefore, the current reforms are designed to provide for more effective and accountable management of PWC’s businesses, and improve incentives for the businesses to be operated efficiently and sustainably.

NOTES ON CLAUSES

Part 1 – Preliminary matters

Clause 1. Short title

The clause provides that the Act may be cited as the Power Retail Corporation Act 2014.

Clause 2. Commencement

The provisions of the Legislation commence on the day fixed by the Administrator by Gazette notice.

Clause 3. Definitions

This clause defines terms used in this Bill.

Sub-clause (1) clarifies that the CEO means the person appointed under section 16 of the Government Owned Corporations Act to be the chief executive officer of RetailCorp.

Sub-clause (2) makes clear that the abbreviation RetailCorp is short for the Power Retail Corporation established by section 5 of the Act.

Clause 4. Act binds Crown

This clause provides that the Bill will bind the Crown in each of its capacities.

Part 2 – Power Retail Corporation

Clause 5. RetailCorp established

This clause legally establishes the Power Retail Corporation.

Clause 6. Government owned corporation

This clause designates the Power Retail Corporation as a Government owned corporation, meaning that the provisions of the Government Owned Corporations Act will apply to the Power Retail Corporation.

Clause 7. Status as Agency

Sub-clause (1) - The purpose of this clause is to specify that the Corporation will be an Agency for the purposes of the Public Sector Employment and Management Act (PSEMA), but for no other Act. This will have the effect of applying the provisions of PSEMA to the Corporation, subject to the amendments set out in clause 8 below.

Sub-clause (2) – This confirms that, since the Corporation will be an Agency only for the purposes of PSEMA, an Administrative Arrangement Order cannot nominate the Corporation as an Agency.

Clause 8. Matters relating to the Public Sector Employment and Management Act

Sub-clause (1) nominates the CEO of the RetailCorp as the CEO for the purposes of PSEMA.

Sub-clause (2) amends the operation of the PSEMA as it applies to the Corporation. This is because certain provisions of PSEMA relate to the Ministerial oversight of Agencies. For Government owned corporations there is a separate scheme of Ministerial oversight provided by the Government Owned Corporations Act (GOC Act). To ensure a consistent approach to Ministerial oversight, where PSEMA provisions are inconsistent with the provisions of the GOC Act, then they are either disapplied or amended as follows:

- Section 22 of PSEMA will not apply to the Corporation. Section 22 of PSEMA provides a regime for directions to be given by the Minister. There is an alternative regime for Ministerial direction under the GOC Act which is more appropriate to a commercial corporation.

- Section 23 of PSEMA will not apply to the Corporation. Section 23 of PSEMA provides that the CEO is responsible to the Minister. The GOC Act sets out the Ministerial accountability framework that applies to the Corporation.

- Section 24(1) of PSEMA would be omitted with an alternative inserted. Section 24(1) of PSEMA sets out that the functions of the CEO are to manage and provide strategic leadership of the Agency. This is not consistent with section 15 of GOC Act, which provides that the board of the Corporation, not the CEO, is responsible for the operation of the Corporation. The revised Clause makes clear that the functions of the CEO under PSEMA are to employ and manage employees in accordance with that Act for the purpose of enabling the Corporation to perform its functions.

- Sections 24(2) and (3) of PSEMA are disapplied. These provisions set out the functions of an agency CEO. These functions are not consistent with the provisions of the GOC Act or with the commercial focus of the CEO of a Government owned corporation. The functions under PSEMA include, for instance, to be “responsive to government policies and priorities” and “uphold the public sector principles”. The Corporation, in contrast, is established as a commercial enterprise with specific functions under its own Act and obligations under the GOC Act to operate commercially. The GOC Act (s.29 and s.30) then provides a specific regime for the Minister to direct the Corporation to comply with specific policies or to act in the public interest. Accordingly, these provisions are disapplied. However, for the PSEMA framework to be effective, it is appropriate for the CEO to be required to uphold the human resource management principle and performance and conduct principle. Accordingly, this requirement is retained.

- Sections 24(3)(b) and 24(3)(h) of PSEMA are disapplied. Section 24(3)(b) requires CEOSs to meet objectives set by the Minister. For a GOC, this is set through the Statement of Corporate Intent (as set out in ss39-41 of the GOC Act). Section 24(3)(h) provides that the CEO should be responsible for “devising and implementing financial and management plans for the Agency and monitoring the Agency's financial and administrative performance”. For GOCs, Part 3 Division 4 and Part 4 of the GOC act provides a separate and specific accountability regime that is not consistent with the framework set out in s.24(3)(h) of PSEMA.

- Section 24(4) of PSEMA – is modified to remove references to “any other Act”. Section 24(4) of PSEMA provides that functions can be conferred on the CEO by other Acts. As the CEO of the Corporation is an Agency CEO only for the purposes of PSEMA, it is not relevant for functions to be conferred by other Acts. Apart from PSEMA, the functions of the CEO are set out in the GOC Act.

- Section 27 of PSEMA is disapplied – This section provides a regime for delegation by the CEO. Section 16 of the GOC Act provides the regime for appointment CEOs to GOCs including the process of delegation. This should prevail over the PSEMA Act, so section 27 of PSEMA is disapplied.

- Section 28 of PSEMA is disapplied. This section provides a regime for CEOs reporting performance. This is not consistent with the reporting framework imposed on GOCs by virtue of Part 4 Division 2 of the GOC Act.

PART 3 – Functions of RetailCorp

Clause 9. Functions

This clause sets out a range of functions that are consistent with the objective of the Corporation to be a retail supplier of electricity. It includes the purchase, sale and generation (subject to proposed section 10) of electricity. It also includes a range of allied functions including: to supply services to improve the efficiency of electricity supply and manage demand for electricity; provide services that are necessary to perform its functions; and to develop products, technology or intellectual property that relates to their functions.

Clause 10. Restriction on generation of electricity

Even though one of the functions of RetailCorp is to generate electricity, this section prevents the Corporation from being a generator of electricity for a period of at least five years from the commencement of operations.

The purpose of this restriction is to ensure that the structural separation of the Power and Water Corporation is effective. This prohibition period will ensure that the Power Retail Corporation cannot abuse its dominance in the retail electricity market by preventing the Retail Corporation re-integrating upstream supply of electricity.

Sub-clause (2) provides that the restriction will last for an initial period of five years and can be extended by the Minister by a notice in the Gazette.

Sub-clause (3) gives the Minister power to authorise RetailCorp to generate electricity during the prohibition period for specified defined purposes.

Clause 11. Review of restriction on generation

This clause provides for a mandatory review of the restriction on generation before the expiry of four years.

The purpose of the review is to determine the effectiveness of the prohibition on generation on the encouragement of competition in the power generation, power retail and wholesale electricity markets in the Territory. This review can be used by the Minister in deciding whether to extend the prohibition.

Clause 12. Extension of generation restriction period

This clause sets out the regime that must be followed by the Minister if they wish to extend the prohibition period.

Sub-clause (1) provides that the period can be extended by up to a further five years, by notice in the Gazette.

Sub-clause (2) requires that the Minister first conduct the review mentioned in clause 11 before they can extend the period, and that the extension must be gazetted before the first prohibition period ends.

Sub-clauses (3)-(5) require that any declaration to extend the prohibition period must be promptly tabled in the Assembly.

PART 4 – Miscellaneous matters

Clause 13. Exemption from local government rates etc.

As with all Government owned corporations, the clause provides for an exemption from local government rates. This does not confer any advantage on the corporation, as the Territory levies the equivalent of local government rates through the Territory Tax Equivalent Regime.

Clause 14. Protection of employees from personal liability

This clause provides the new Corporation’s employees with protection from personal liability for acts done in good faith in the course of their operations. This is the same protection currently afforded employees of the Power and Water Corporation.

Clause 15. Authentication of documents

This clause provides a clarification that documents requiring authentication by RetailCorp are sufficiently authenticated without the seal of RetailCorp if signed by a person authorised to do so by RetailCorp's board.

Clause 16. Money due to Corporation

This clause provides that any money due to the Corporation under this Act may be recovered by the Corporation as a debt. The reason for this clause is that historically there is a distinction between an action for damages and an action for debt. The advantages of taking an action for a debt are:

- The action is more aligned to an action for detention of money rather than breach of contract and so concepts like mitigation of loss do not apply;

- There is no requirement for a plaintiff to prove loss or damage;

- In the defence of prior payment the onus of proof is on the defendant.

Clause 17. Regulations

This clause provides the Administrator with a regulation making power.

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