1998
 
 

_______________________
 
 

PARLIAMENT OF TASMANIA

_______________________
 
 
 
 
 
 

PARLIAMENTARY STANDING COMMITTEE OF PUBLIC ACCOUNTS
 
 
 
 
 
 
 
 
 
 
 

DISAGGREGATION OF THE HYDRO-ELECTRIC CORPORATION AND OTHER RELATED MATTERS
 
 
 
 
 
 
 
 
 

INTERIM REPORT ON DISAGGREGATION
 
 

_________________________________________
 
 

Laid upon the Tables of both Houses of Parliament

___________________________
 
 

The Committee was appointed under the provisions of section 2 of the Public Accounts

Committee Act 1970 (No 54)


 

















Preface
 
 

In presenting this interim report, the Public Accounts Committee has endeavoured to meet its obligation of providing comprehensive information to the Parliament and the people of Tasmania to inform future debate.
 
 

The report takes into consideration evidence gathered from 87 documents, many substantial and complex reports, 10 submissions and representation made by 44 witnesses. It provides details of important and relevant background information as context for the reader.
 
 

As an interim report, the report focuses on the matter of disaggregation and only deals with the matters of the sale/lease of the transmission and distribution/retail businesses of the HEC and the proposed development of Basslink as they relate directly to the debate about disaggregation. Detailed consideration of sale/lease and Basslink has been reserved for subsequent reports.
 
 

Whilst the Committee has drawn out a set of findings and conclusions on the key issues, it has limited its recommendations about the appropriate structure for the disaggregated transmission and distribution/retail businesses because the choice of option hinges on whether the sale/lease of these businesses is appropriate and whether Basslink is viable and appropriate.

The findings, conclusions and recommendations presented in this report must not be considered to pre-empt those that may be made in subsequent reports.
 
 
 
 

Table of Contents
 
 

PREFACE
 
 

SUMMARY OF FINDINGS
 
 

conclusions and recommendations
 
 

Chapter 1 - Introduction *

1.1 Background *
 
 

1.2 Issues Underpinning the Reference *
 
 

1.3 The Committee’s Terms of Reference *
 
 

1.4 Collection and Evaluation of Evidence *
 
 

1.5 Interim Report on Disaggregation *
 
 
 
 

 Chapter 2 - Overview of Electricity Reform in Australia * 2.1 COAG’s Electricity Reform Agenda *
 
 

2.2 The National Electricity Market *
 
 

2.3 National Competition Policy Reform *
 
 

2.4 State and Territory Progress in Reform *

2.4.1 Market Development *

2.4.2 Structural Reform *
 
 

 2.5 Tasmania’s Progress in Reform * 2.5.1 Commitments under NCP and COAG Agreements *

2.5.2 Legislative Reform *

2.5.3 Disaggregation of the HEC *

2.5.4 The Government’s Plans for Further Reform *
 
 
 
 

 Chapter 3 - The Rationale for Electricity Reform in Tasmania *
 
  3.1 The Problems and Reform Issues * 3.1.1 Obligations under the NCP and COAG Agreements *

3.1.2 Business Imperatives for the Hydro-Electric Corporation *

3.1.3 The State’s Economic and Fiscal Position *

3.1.4 Future energy supply and risk management *
 
 

 3.2 The Proposed Solutions * 3.2.1 The Government’s Position *

3.2.2 The Outcomes Sought *

3.2.3 Alternative Solutions Proposed *
 
 

 3.3 The Relationship Between Disaggregation, Sale/Lease and New Supply Options *
 

Chapter 4 - Structural Approaches to Disaggregation *
 
 

4.1 The Current Structure of the HEC and its Operation as a Vertically Integrated Monopoly *
  4.2 What is Disaggregation? * 4.2.1 Vertical and Horizontal Disaggregation *

4.2.1 The Corporate Structures for Disaggregated Units *
 
 

 4.3 The Scope of Disaggregation * 4.3.1 Generation *

4.3.2 Transmission *

4.3.3 Distribution and Retail *

4.3.4 Other Observations *
 
 

 4.4 Comparison of Corporate Structures * 4.4.1 Operational Characteristics *

4.4.2 Issues Relating to the Disposal of assets/businesses *

4.4.3 Establishment phase for structure with existing assets in HEC *
 
 

 Chapter 5 - Rationale for the Disaggregation of the HEC * 5.1 The obligations of NCP and COAG agreements * 5.1.1 The Need to Disaggregate *

5.1.2 The Appropriate Corporate Structure *

5.1.3 Timing Issues *
 
 

 5.2 The Development of Competition in the ESI * 5.2.1 The Need to Disaggregate *

5.2.2 The Appropriate Corporate Structure *

5.2.3 Timing Issues *
 
 

 5.3 Business Imperatives for the Hydro-Electric Corporation * 5.3.1 The Need to Disaggregate *

5.3.2 The Appropriate Corporate Structure *

5.3.3 Timing Issues *
 
 

 5.4 The proposed entry of Tasmania to the NEM * 5.4.1 The Need to Disaggregate *

5.4.2 The Appropriate Corporate Structure *

5.4.3 Timing Issues *
 
 
 
 
 
 

 5.5 The Need for Certainty on the Part of Basslink Investors * 5.5.1 The Need to Disaggregate *

5.5.2 The Appropriate Corporate Structure *

5.5.3 Timing Issues *
 
 

 5.6 Sale/Lease of the Transmission and Retail/Distribution Businesses * 5.6.1 The Need to Disaggregate *

5.6.2 The Appropriate Corporate Structure *

5.6.3 Timing Issues *
 
 

 5.7 Summary Comparison *
 
 

5.8 The Costs and Benefits of Disaggregation and Impact on the Consolidated Fund *

5.8.1 The Costs and Benefits of Disaggregation *

5.8.3 The Impacts of Disaggregation on the Consolidated Fund *
 
 

 5.9 The Impact of Disaggregation on Contractual Obligations *
 
 

5.10 The Impacts of Disaggregation on Employment *
 
 

5.11 Consumer Impacts from Disaggregation *
 
 

5.12 Conclusions and Recommendations *
 
 
 
 

 GLOSSARY
 
 
 
 

APPENDICES
 
 

APPENDIX 1 LIST OF DOCUMENTS TAKEN INTO EVIDENCE
 
 

APPENDIX 2 LIST OF SUBMISSIONS
 
 

APPENDIX 3 LIST OF WITNESSES
 
 
 
 

Summary of Findings
 
 

Finding 1 (Section 4.3.1, p.32)
 
 

The Committee believes at this stage that formation of a single generation business is appropriate, but it has not ruled out consideration of horizontal disaggregation at a later stage.
 
 
 
 

Finding 2 (Section 4.3.2, p.32)
 
 

The Committee concluded that formation of a single transmission business is appropriate.
 
 
 
 

Finding 3 (Section 4.3.4, p.34)
 
 

The Committee noted:
 
  The Committee noted the NCC Secretariat’s views on the separation of the distribution and retail businesses.
 
 

The Committee considered that, provided the Government is able to demonstrate that there is a clear public interest in retaining an integrated distribution/retail entity upon introduction of the retail market, there should be no impediment to doing so.
 
 
 
 

Finding 4 (Section 5.1.1, p.43)
 
 

The Committee found that:
 
 
 
 
 
 
 
  Finding 5 (Section 5.1.2, p.43)
 
 
 
 
  Finding 6 (Section 5.1.2, p.44)
 
 

The Committee concluded that:
 
 
 
  Finding 7 (Section 5.1.3, p.45)
 
 

The Committee found that, outside NEM connection, there were no specific obligations under the NCC and COAG Agreements in respect of the timing of disaggregation.
 
 
 
 
 
 

Finding 8 (Section 5.2.1, p.48)
 
 

The Committee found that:
 
 
 
  Finding 9 (Section 5.2.2, p.49)
 
 

The Committee noted that:
 
 
 
  Finding 10 (Section 5.2.3, p.49)
 
 

The Committee found that there was some evidence to suggest that the sooner disaggregation is achieved the sooner some competition can be introduced into elements of the Tasmanian ESI.

competition can be introduced into the ESI, however minimal it might be initially.
 
 
 
 

Finding 11 (Section 5.3.1, p.51)
 
 

The Committee found that the strongcurrent imperatives to disaggregate the HEC include:
 
 
 
  Finding 12 (Section 5.3.2, p.52)
 
 

The Committee found that:

 The Committee formed the view that either structure had the potential to yield efficiency gains and reduced monopoly power in comparison to the current HEC structure but that separate companies had the potential to yield greater gains in this sense than did subsidiaries.
 
 
 
  Finding 13 (Section 5.3.3, p.52)
  The Committee considers that if the Parliament supports the process of disaggregation then the process of company formation should continue in line with the HEC timetable, which seeks to establish the companies to commence from 1 July 1998.
 
 
 
 
 
 

Finding 14 (Section 5.4.1, p.54)
 
 

The Committee found that:
 
 
 
  Finding 15 (Section 5.4.2, p.55)
 
 

The Committee concluded that operators in the NEM are structured as both GBE and privately owned company models. The use of either separate company or separate GBE models for Tasmania is a matter of choice.
 
 
 
 
 
 

Finding 16 (Section 5.4.3, p.55)
 
 

Evidence indicated that a reasonable lead-time is necessary to allow entities to prepare for competition in the NEM. It is suggested that around two years prior to connection would be an appropriate period.
 
 
 
 
 
 

Finding 17 (Section 5.5.1, p.56)
 
 

The Committee acknowledged the Government’s view that investors working on a major investment require certainty on the system in which they would have to work. There areFailure to disaggregate which a developer may be seen by an investor as an obstacle to committing funds.

, in particular, the issue of disaggregation
 
 
 
 

Finding 18 (Section 5.5.2, p.57)
 
 

The Committee concluded in providing certainty for potential Basslink investors that:
 
 
 
  Finding 19 (Section 5.5.3, p.57)
 
 

The Committee considers that the early action to form the newdisaggregate would be important company to facilitate genuine expressions of interest in the development of the Basslink project.
 
 
 
 
 
 

Finding 20 (Section 5.6.2, p.59)
 
 

The Committee found that the disaggregation of electricity assets to form separate businesses was an essential prerequisite to sale.
 
 
 
 
 
 

Finding 21 (Section 5.6.3, p.59)
 
 

The Committee found that the Government’s current timetable would require prompt action on disaggregation given the plan to introduce legislation to progress the sale or lease later in 1998.
 
 
 
 
 
 

Finding 22 (Section 5.8.1, p.63)
 
 

The Committee found that:
 
 
 
  Finding 23 (Section 5.8.2, p.63)
 
 

Disaggregation provides for potential efficiency gains and improved business focus leading to cost reductions and new business opportunities that may offset the additional costs.
 
 
 
 
 
 

Finding 24 (Section 5.8.3, p.65)
 
 

The Committee concluded that disaggregation is unlikely to have a significant effect on the Consolidated Fund.
 
 
 
 
 
 

Finding 25 (Section 5.9, p.66)
 
 

The Committee considers that the Government must ensure that contracts to supply electricity and other services which have anti-competitive components must be transparent and demonstrably in the public interest.
 
 

The Committee concluded that, in disaggregation, changes to contractual arrangements will need to be managed to minimise financial risk.
 
 
 
 
 
 

Finding 26 (Section 5.10, p.68)
 
 

The Committee concluded that the management of the disaggregation process must take significant account of human resource management to minimise skill loss.
 
 

The Committee concluded that, following the disaggregation process, efficiency improvement is likely to result in reductions in employment levels. However, it was recognised that the subsequent proposals for sale or lease could have more significant employment impacts.
 
 
 
 
 
 

Finding 27 (Section 5.11, p.69)
 
 

The process of disaggregation is not likely to create particular consumer impacts. However, in any intermediate phase between disaggregation and sale/lease where a business is being prepared for sale/lease whilst in public ownership, its performance in relation to consumer issues such as disconnections should be monitored to ensure no significant negative impacts occur.
 
 
 
 
 
 

 Conclusions and Recommendations
 
 
 
 

It must be noted that this is an interim report about disaggregation and the Committee has not yet completed its deliberations about the sale/lease of the transmission and distribution/retail businesses and the proposed development of Basslink. As such, the findings, conclusions and recommendations presented must not be considered to pre-empt those that may be made in subsequent reports.
 
 

The Committee recommends that the HEC be disaggregated into three separate businesses:
 
 

The Committee concluded that disaggregation is unlikely to have a significant effect on the Consolidated Fund.
 
 

The Committee concluded that a number of factors indicate that there are significant impediments to the development of competition in both the generation and retail sectors of the Tasmanian electricity supply industry. These include:
 
 

The Committee concluded that these factors would prevail regardless of whether the businesses are operated in public or private ownership.
 
 

The Committee concluded, however, that disaggregation is the first step to the introduction of contestability and subsequent competition in the generation and retail sectors.
 
 

The Committee, in recommending disaggregation as a first step to the introduction of competition, recommends that significant effort be applied in preparing further strategies to enable the development of competition in the generation and retail sectors of the Tasmanian electricity supply industry.
 
 

The Committee concluded that the preferred corporate structure for each business is dependent on the outcome/s sought through disaggregation. The options are summarised in the following table.
 
 
 
 
 
 

OUTCOME SOUGHT: FUTURE DEVELOPMENT OF ELECTRICITY SUPPLY INDUSTRY IN TASMANIA

(in isolation from NEM interconnection and equity withdrawal)
 
 
 
 
 
outcome sought corporate structure options

for transmission and distribution/retail businesses

 is disaggregation recommended? benefits/considerations time considerations

 
FUTURE DEVELOPMENT OF ELECTRICITY SUPPLY INDUSTRY IN TASMANIA

(in isolation from NEM interconnection and equity withdrawal)

 Wholly Government owned private companies established under the Electricity Companies Act 1997.
 
 

 

 Yes
  • Consistent with model proposed by Government. 
  • Can be rapidly implemented given legislation already in place. 
  • Provides complete separation of business elements. 
  • Clear capacity to meet NCP obligations. 
  • Accountable to Parliament through the Memorandum and Articles of Association of the companies.
  • Legislation for disaggregation in place through Electricity Companies Act 1997. 
  • Disaggregation can continue consistent with HEC’s current timeframe of 1 July 1998 for start of new businesses.
 
Separate GBEs

 

 Yes
  • Consistent with existing GBE structures. 
  • Provides complete separation of business elements. 
  • Able to comply with all NCP requirements. 
  • Currently accountable to Parliament.
  • New legislation required.
 
Subsidiaries of existing HEC

 

 Yes
  • Enables smooth transition to disaggregated structure for HEC. 
  • Does not provide for complete separation of business elements - remaining connection between businesses through HEC Board. 
  • Potentially fulfils COAG/NCP obligations in isolation from NEM but not fully tested. 
  • Simplifies accounting transition for HEC. 
  • Allows maximum flexibility to Government to vary structure in the future. 
  • Originally HEC preferred position but later changed.
  • No new legislation required.
  • Can be implemented for 1 July 1998 start based on previous HEC view

 
 
 

OUTCOME SOUGHT: DEVELOPMENT OF BASSLINK AND NEM INTERCONNECTION
 
 
 
 
 
outcome sought corporate structure options for transmission and distribution/retail businesses is disaggregation recommended? benefits/considerations time considerations

 
DEVELOPMENT OF BASSLINK AND NEM INTERCONNECTION Wholly Government owned private companies established under the Electricity Companies Act 1997.

 

 Yes
  • Fully complies with COAG/NCP obligations. 
  • Well recognised corporate structure. 
  • Consistent with models in other States involved in NEM. 
  • Distribution/Retail structure not fully resolved with NCC.
 
  • Legislation for disaggregation in place through Electricity Companies Act 1997. 
  • Entry currently proposed for 2001-2002 with lead-time for investor commitment and development. 
  • Disaggregation timing is not critical but consistent with HEC’s current timeframe of 1 July 1998.
 
Separate GBEs

 

 Yes
  • Potentially complies with COAG/NCP obligations but not fully tested. 
  • Well established model in Tasmania. 
  • Comparable to models in other states involved in NEM. 
  • Distribution/Retail structure not fully resolved with NCC.
 
  • New legislation required. 
  • Entry currently proposed for 2001-2002 with lead-time for investor commitment and development. 
  • Disaggregation timing is not critical but consistent with HEC’s current timeframe of 1 July 1998.
 
Subsidiaries of existing HEC Yes
  • Does not comply with COAG and NCP obligations for NEM. 
  • Could be considered for interim step. Cannot be recommended in longer term.
 
  • No new legislation required.
  • Acceptable prior to entry to the NEM.

 
 
 

OUTCOME SOUGHT: EQUITY WITHDRAWAL VIA LEASE OR SALE
 
 
 
 
 
outcome soughtcorporate structure options for transmission and distribution/retail businessesis disaggregation recommended? benefits/considerations time considerations

 
EQUITY WITHDRAWAL VIA LEASE OR SALE Wholly Government owned private companies established under the Electricity Companies Act 1997.
 
 
 
 

 

 Yes
  • Maximises value for sale. 
  • Preferred structure in consultant’s work. 
  • Model is well understood in marketplace. 
  • Ensures separation risk is minimised. 
  • Not tested for lease.
 
  • Legislation for disaggregation in place through Electricity Companies Act 1997. 
  • Requires a minimum six months’ trading results for "due diligence" processes. 
  • Disaggregation can occur consistent with Government’s timeframe to achieve new structures from 1 July 1998. 
  • Consistent with the HEC timetable for change.
 
Separate GBEs Yes
  • Unlikely to affect sale price. 
  • Potentially less acceptable than private company due to more limited familiarity in marketplace. 
  • Not tested for lease.
 
  • New legislation required. 
  • Requires minimum six months’ trading results for "due diligence" processes.
 
Subsidiaries of existing HEC Yes
  • Not preferred for sale as the model increases the separation risk. 
  • Could only be considered as interim position to simplify initial separation. 
  • Not tested for lease.
 
  • No new legislation required. 
  • Would require additional time to move to full separation and have minimum of six months’ trading results.

  1. Introduction
1.1 Background
 
 

The Public Accounts Committee Act 1970, provides for the establishment of a joint committee, comprising three members from the Legislative Council and three from the House of Assembly, with the function of inquiring into, considering and reporting to the Parliament on any matter referred to it by either House.
 
 

The current membership of the Public Accounts Committee (PAC) is as follows:
 
 

Mr George Shaw MLC (Chair)

Mr Peter Schulze MLC

Dr David Crean MLC

Mr Robert Mainwaring MHA

Mr David Llewellyn MHA

Mr Michael Foley MHA
 
 

 The Committee has the power to summon witnesses to appear before it to give evidence and to produce documents (s7(1)) and, except where the Committee considers that there is good and sufficient reason to take it in private, all evidence is taken by the Committee in public (s7(3) as amended).
 
 

On Thursday 9 December 1998, the PAC received a reference from the Legislative Council through the following motion, which was agreed to following debate:
 
 

‘That the Legislative Council request the Standing Committee of Public Accounts to assess and report on the revenue implications for the Consolidated Fund on disaggregation of the Hydro Electric Corporation and other related matters.’
 
 

1.2 Issues Underpinning the Reference
 
 

In moving that the matter be referred to the Public Accounts Committee (PAC) the debate reflected discussion and concern arising from the Electricity Companies Bill 1997 which had previously been debated and passed by the Parliament.
 
 

The Electricity Companies Bill 1997 provided for the establishment of companies for one or more of the transmission, distribution, and retailing of electricity in Tasmania. It was the view of many members of both Houses of Parliament that there was a dearth of information regarding the motivations behind the Bill and its financial implications.
 
 
 
 

1.3 The Committee’s Terms of Reference
 
 

The PAC met on 22 December 1997, reviewed the reference and established a range of matters that were to be considered in the Terms of Reference. The Terms of Reference were then publicly notified in newspapers on 10 January 1998. The Terms of Reference stated:
 
 

The Standing Committee of Public Accounts has received a reference from the Legislative Council
 
 

‘to assess and report on the revenue implications for the Consolidated Fund on disaggregation of the Hydro-Electric Corporation and other related matters’.
 
 

The Committee has determined that ‘related matters’ include Basslink and the sale of equity in the Hydro Electric Corporation.
 
 

The following points may also be considered in relation to the Terms of Reference:-
 
 
  1. The direct and indirect social usefulness of this public asset.
  2. The impact on consumers and specific groups in the community and the quality of service to them.
  3. The retention value of the enterprise measured against its sale and disaggregation value.
  4. The impact on employment, skills training and conditions and the protection of the existing workforce.
  5. The existing competing demands on the Tasmanian Public sector and existing budgetary constraints and/or the alternative sources of funds for public sector investment.
  6. Current environmental impact and the need to continue and enhance environmental protection.
  7. Any administrative economies of scale and coordination that may be facilitated by (public ownership) sale or disaggregation.
  8. Appropriate weighting of long term as well as short to medium term considerations.
  9. Any other relevant matters.

 
 

On 9 March 1998, following developments on the options for the process of equity withdrawal from the HEC, the Committee resolved to explicitly recognise the option of a long-term lease in addition to a sale. The resolution recorded in the Minutes is:
 
 

That recognition of a lease option be included by adding "/lease" to the word sale wherever occurring in the description of related matters and points which may also be considered in relation to the Terms of Reference.
  1.4 Collection and Evaluation of Evidence
 
 

Following the establishment of its Terms of Reference, the Committee advertised publicly on 10 January 1998 seeking submissions from any interested parties. In addition, the Committee sought advice from various individuals including the Hon J Cleary, MHA, on appropriate witnesses to call to give evidence on the matters under consideration.
 
 

The Committee received 10 submissions and, as at 16 April 1998, has heard evidence from 44 witnesses (not including return presentations) in Hobart, Melbourne and Sydney.
 
 

The Committee has gained a significant volume of material through submissions, witness presentations, committee questioning, the subsequent tabling of reports, additional information on specific questions and independent research of issues. A list of witnesses interviewed and the reports and other information formally taken into evidence are provided as Appendices.
 
 

All witnesses were offered the chance to make a general presentation on the Terms of Reference, following which a question and answer model was adopted with Committee members exploring issues as seen necessary. In the case of certain key witnesses, several attendances were necessary to cover all the issues. Copies of all evidence have been provided to each member of the Committee.
 
 

In its work the Committee has been supported by the Executive Officer, Ms Heather Thurstans and two officers, Mr Simon Barnsley and Ms Sarah Male, seconded from other agencies to assist in analysis and report development. The Committee is grateful for their positive contribution.
 
 

The Committee has met on the following days in the pursuit of its inquiry:
 
 
 
Wednesday 10 December 1997 Wednesday 25 February (Melbourne) Monday 30 March
Monday 22 December 1997 Monday 9 March Monday 6 April
Friday 23 January  Tuesday 10 March Tuesday 7 April
Monday 2 February  Thursday 12 March Wednesday 8 April
Wednesday 11 February  Friday 13 March Thursday 9 April
Friday 13 February Wednesday 18 March (Sydney) Wednesday 15 April
Monday 23 February (Melbourne) Thursday 19 March (Sydney) Thursday 16 April
Tuesday 24 February (Melbourne) Thursday 26 March  Friday 17 April

 

Members have invested significant time outside meetings in the reading and consideration of the material presented. Transcripts of all witnesses’ sworn evidence (except that taken in camera) have been placed on the Internet and are accessible at http://www/parliament.tas.gov.au/pacc.htm
 
 

1.5 Interim Report on Disaggregation
 
 

Due to the need to address initially the matter of disaggregation of the HEC, consistent with the Electricity Companies Act 1997, this report does not consider all matters covered in the Terms of Reference. The PAC accepted the priority of Government to resolve the matter of disaggregation and has thus reported on this area to allow relevant decision making processes to continue. The Committee has concluded most of its evidence gathering on the issue of disaggregation and has chosen to produce this Interim Report.
 
 

In preparing the Interim Report the Committee has had regard to the evidence provided through a very intensive program of investigation and analysis. In many cases, submissions and witnesses addressed matters relating to all aspects of the Terms of Reference and were not confined to the issue of disaggregation of the HEC and its impact on the Consolidated Fund.
 
 

The Report is confined to the issues arising out of the Government’s proposals for disaggregation. Basslink and the sale or lease of HEC assets is touched on in this report but a comprehensive coverage of these two issues will be provided in subsequent reports.
 
 

The Interim Report is structured in five Chapters. Chapters 1 to 3 provide background and context to the Report by describing the process of electricity reform that is currently underway in Australia and the rationale behind this reform agenda, including national competition policy and microeconomic reform objectives and a description of the National Electricity Market. Chapters 4 and 5 discuss the matter of disaggregation of the Hydro-Electric Corporation and associated issues and provide the Committee’s findings and conclusions in this respect.
 
 
 
 

  1. Overview of Electricity Reform in Australia

    2.  

     
     
     
     

    During the 1990’s an agenda for reform of the Australian electricity sector has emerged to encourage and coordinate the most efficient, economic and environmentally sound development of the electricity industry in eastern and southern Australia through the development of a national grid. The reforms are designed to advance cooperation in the electricity industry, the absence of which has led to excessive generation capacity and inappropriate plant mix and fuel use.
     
     

    The agenda commenced with the 1991 Special Premiers’ Conference (SPC) decision to develop a National Electricity Market (NEM), following a 1991 Industry Commission report which highlighted the potential for significant gains from a competitive electricity market. The SPC decision has been progressively refined through a number of Council of Australian Governments (COAG) agreements from 1992 to 1994, and has been aligned with the development of a package of micro-economic reforms known as National Competition Policy Reform agreed to in April 1995. Under the 1995 Agreement States and Territories agreed to introduce a range of reforms in exchange for a set of financial payments from the Commonwealth.
     
     

    1. COAG’s Electricity Reform Agenda
The key objective of the COAG electricity reform agenda is to develop a fully competitive National Electricity Market (NEM) across participating jurisdictions. Participating jurisdictions currently include New South Wales, Victoria, the Australian Capital Territory and South Australia with Queensland intending to participate once the interconnection is built (expected about 2000 to 2001). Tasmania is not required to be a participating jurisdiction until such time as it is connected to the mainland grid, as is proposed through the establishment of Basslink.
 
 

The SPC established the National Grid Management Council (NGMC) in 1991 to develop an open market in electricity in the southern and eastern States of Australia. A set of rules and standards to govern trading and pricing arrangements under the NEM to be known as National Electricity Code of Conduct (NEC) has been developed. The NEC was submitted to the ACCC in November 1996 for accreditation and authorisation that was forthcoming in December 1997. Jurisdictions are now in the process of completing the steps required to give the NEC legal effect.
 
 

Participating jurisdictions have established two national companies - the National Electricity Market Management Company (NEMMCO) and the National Electricity Code Administrator (NECA) to oversee the operation of the NEM:
 
 

The trading and management/administration arrangements in the NEM are described in greater detail in Section 2.2, below.
 
 

The COAG agenda to introduce a range of benefits into the Electricity Supply Industry (ESI) aims to promote efficiency by increasing competitive pressures within and between State electricity grids. This is expected to deliver:
 
 

    1. The National Electricity Market
The National Electricity Market (NEM) has been designed to create competition in the generation and retailing of electricity across all of the participating jurisdictions.
 
 

In the past, the generation, transmission, distribution and retailing of electricity was all under the control of single publicly owned monopolies such as the Hydro-Electric Commission and the State Electricity Commission of Victoria (SECV). This model meant everything was planned and controlled centrally without the benefit of market signals to guide decisions. In some cases, this led to significant over-investment and created excess capacity in generation that presently exists in Victoria and New South Wales. There has been very limited electricity trading across state boundaries. South Australia has been purchasing electricity from Victoria and the Snowy Mountains scheme provided electricity to NSW, Vic and ACT.
 
 

In the competitive markets established in Victoria and NSW, and progressively in the NEM, generators must compete to supply electricity forcing them to operate as efficiently as they can. Retailers will be able to choose with whom they contract, which will put further pressure for efficiency in generation. The retailers themselves will also face competitive pressure on their price over cost margins and the need to better package services to meet their customers’ needs. It is argued by those involved in the development of the NEM that the benefits of competition that will accrue to consumers are lower prices and better choice and quality of services. The market price of electricity will determine whether new capital investment is needed and is economic.
 
 

The NEM works through a wholesale spot market or pool in which generators’ bids to supply power to the pool (and therefore to be allowed to generate) are matched against retailers’ (and potentially end-use customers) bids to buy power. This results in a price every half-hour, which varies depending on the electricity load required. The spot price for each half-hour (trading interval) is set at the average of six dispatch prices for each five-minute period in the trading interval. The highest price bid or offer dispatched in a five-minute period will set the dispatch price for that five minutes.
 
 

Retailers, generators, and customers large enough to buy wholesale, can all buy and sell through the pool. It means that the real value of electricity, in terms of what it is worth to customers and what it costs to produce, is determined as a market price. This allows the physical flow of electricity between generators and customers to be balanced by the system operator, NEMMCO.
 
 

With the price changing every half-hour, only those professionally skilled to deal in the wholesale market will choose to accept exposure to such a variable market price. To minimise this exposure it will be possible and prudent for most generators, retailers and larger customers in the market to enter into contracts to get a degree of certainty over price. A variety of contractual arrangements may be used for this purpose and will be brokered on behalf of market participants by traders.
 
 

While the prices between generators, retailers and large customers are determined under these competitive arrangements, because the transmission and distribution networks are natural monopolies, charges for access to, and use of, these networks are regulated so as to reflect fairly the cost. This price regulation is presently undertaken by each participating jurisdiction. As the market develops, the responsibility for price regulation of the interstate network will move to the ACCC.
 
 

As outlined above, the operation of the market is managed by NEMMCO that comprises members from each of the participating jurisdictions. The rules governing the NEM are contained in the National Electricity Code that is intended to ensure that competition is fair and ensures an efficient, secure and safe electricity system.
 
 

The ACCC is has commenced a process to develop transmission pricing arrangements for the national grid. In the Tasmanian context, Government Prices Oversight Commission (GPOC) is about to commence a pricing review for the Tasmanian transmission system.
 
 

The development of the NEM is seen as a principal component of Australia’s ongoing micro-economic reform agenda. The main objectives of the fully competitive NEM, as specified by COAG at a meeting on 19 August 1994 are:
 
 

The NEM will allow energy supply companies to trade across State and Territory boundaries through a single wholesale power ‘pool’ with the expectation that consumers will be able to reap the benefits of competition using their power of choice to obtain better deals on price and quality of service.
 



 



 

    1. National Competition Policy Reform
In 1991 Commonwealth, State and Territory governments agreed to examine a national approach to competition policy. An independent inquiry into national competition policy was commissioned in October 1992 and its report, now known as the Hilmer Report, was subsequently released in August 1993.
 
 

The recommendations of the Hilmer report were considered by Commonwealth, State and Territory governments and led to agreement on a competition policy reform package in April 1995. The substance of this reform package is to extend the scope of the Trades Practices Act 1974 and establish a process to identify and remove impediments to competition throughout the economy. It includes the establishment of the Australian Competition and Consumer Commission (ACCC), which assumes the functions of the Prices Surveillance Authority and acts as regulator for many industry access arrangements.
 
 

Three inter-governmental agreements were signed at the April 1995 meeting of COAG to support the reform package:
 
 

  1. the Competition Principles Agreement which is the key agreement aimed at removing impediments to competition including legislation, special advantages and disadvantages conferred on some GBEs, restriction on the entry of competitors, monopoly pricing and the structure of some monopolies.
  2. the Conduct Code Agreement which sets out the basis for extending the application of the Trades Practices Act, including to GBEs; and
  3. the Agreement to Implement the National Competition Policy and Related Reforms (or the ‘Money’ Agreement as it has been termed), which provides for redistribution of some of the tax gains, accruing to the Commonwealth as a result of reform, back to the States and Territories which have implemented the reforms.
Under the Competition Principles Agreement the National Competition Council (NCC) was established to assess the progress of each State/Territory with their competition policy and related reforms prior to recommending to the Commonwealth whether they should receive payments under the ‘Money’ Agreement or not. The Reform Requirements and anticipated Competition Payments to Tasmania are set out in the Table below. In addition to the Competition Payments there is an additional per capital Financial Assistance Grant (FAG) Guarantee also associated with the National Competition Policy Agreements. The amount of these FAG payments commences in 1997-98 with a payment of $7.6 million and rises to $62.7 million by 2005-06.
 
 
 
 
 
Tranche  NCP Electricity Reform Requirements Anticipated NCP Payments to Tasmania

(1996-97 prices)
First Tranche, commencing 1997-98
  • Relevant jurisdictions must have taken all measures necessary to implement an interim competitive NEM. 
  • While Tasmania remains not interconnected it is not regarded as a relevant jurisdiction. 
  • NCC assessed Tasmania as having achieved satisfactory progress in the context of being a non-relevant jurisdiction and Tasmania received its first Tranche payment in 1997-98.
 		 Competition Payment:

$5.5 million annually for 1997-98 and 1998-99

FAG Guarantee:

1997-98 $7.6 million

1998-99 $14.4 million

 
Second Tranche, commencing 1999-00
  • Relevant jurisdictions must have completed the transition to a fully competitive NEM by 1 July 1999.
  • Tasmania’s position will depend on development of interconnection to join the NEM.
 		 Competition Payment:

Rises to $11.0 million annually for 1999-00 and 2000-01

FAG Guarantee:

1999-00 $21.1 million

2000-01 $28.0 million

 
First Tranche, commencing 2001-02
  • Relevant jurisdictions must have continued their effective observance of the COAG electricity reform requirements.
  • Tasmania’s position will depend on development of interconnection to join the NEM.
 		 Competition Payment:

Rises to $16.4 million annually from 2001-02 onwards

FAG Guarantee:

2001-02 $34.9 million

2002-03 $41.9 million

2003-04 $48.8 million

2004-05 $55.7 million

2005-06 $62.7 million

 

 

The reforms required for NCP payments include the facilitation of a NEM by participating jurisdictions. The NCC has indicated that Tasmania is not considered a participating jurisdiction while it remains unconnected with the mainland grid but would be required to meet the NEM requirements if interconnected. Tasmania has received its first tranche payment but will need to comply with a number of obligations in relation to electricity reform in order to qualify for its second and third tranche payments. These obligations will exist but differ depending on whether Tasmania interconnects to the mainland grid or not.
 
 

The Tasmanian Government has committed to joining the NEM through the proposed development of Basslink subject to its economic viability. In the view of the NCC, this commitment has placed special obligations on Tasmania over time in contrast to other non-participating jurisdictions. This issue is developed at Section 2.5.1.
 
 

    1. State and Territory Progress in Reform
2.4.1 Market Development
  Victoria has led the development of a wholesale electricity market, one having commenced in July 1994, administered by the Victorian Power Exchange. This, together with the market established in New South Wales in May 1996, has provided the basis for an interim and transitional phase of the NEM known as NEM1, which commenced on 4 May 1997. The ACT is also a participant in NEM1, allowing it to import electricity from Victoria as well as its traditional source in NSW.
 
 

South Australia is connected to the Victorian transmission system and is presently undertaking the necessary structural changes prior to officially joining the NEM in 1998. Queensland is in the process of developing an interconnection with NSW to become part of the NEM in 2001.
 
 

The commencement NEMMCO’s operation of the NEM was due on 28 March 1998 but has now been delayed until mid-May 1998 to allow for full testing of the software and management systems that will integrate the market. The generation and interconnection capacities across the existing and proposed eastern states system are illustrated in the diagram below.
 
 



Source: Department of Treasury and Finance, Victoria, Victoria’s Electricity Supply Industry Towards 2000, June 1997, p.41.
 
 
  2.4.2 Structural Reform
 
 

Victoria
 
 

The former State Electricity Commission of Victoria (SECV) went through a series of changes commencing in October 1993.
 
 

Stage 1 - From monopoly to independent businesses (October 1993)

The disaggregation of the vertically integrated SECV to create three State-owned bodies (equivalent to GBEs) to operate the generation, transmission and distribution/retail components of the former SECV.
 
 

Stage 2 - A competitive industry is established (October 1994) The creation of eight State-owned companies (established under Corporations Law) operating in a competitive framework: Stage 3 - Implementation (From October 1994) Completion of structural changes and implementation of new commercial arrangements so that privatisation of the various businesses could be undertaken. This comprised: A process of privatisation then occurred in Victoria with all distribution companies privatised during 1995, four generation businesses privatised in the period May 1996 to April 1997 and the transmission business privatised in 1997.
 
 

The process has included development of accompanying regulatory structures including the Office of the Regulator General and the Office of the Electricity Ombudsman.
 
 
 
 

Other States
 
 

In other States, the changes have not been as radical as those in Victoria but all demonstrate significant changes as summarised in the Table below.
 
 
State/Territory Progress
New South Wales

 
  • Electricity Commission of NSW (Pacific Power) restructured in 1991 into commercially oriented business units, with the Network (transmission) business unit formally established as a separate legal entity in 1994.
  • Disaggregating Pacific Power into three state-owned corporations (GBE comparable) – Pacific Power, Macquarie Generation and Delta Electricity – from March 1996 created three principal generators.
  • Transmission is operated by a separate entity Transgrid that has responsibility for implementation of the NSW wholesale electricity market.
  • 25 distribution authorities amalgamated into six large state-owned corporations operational from March 1996.
  • Working to a timetable of fully deregulating its retail market by July 1999.
South Australia
  • In 1995 Electricity Trust of South Australia (ETSA) corporations (GBE comparable) was established as a holding company with four wholly owned subsidiary corporations ETSA Generation, ETSA Transmission, ETSA Power and ETSA Energy
  • ETSA disaggregated to form two entities in Jan 1997 -– ETSA Corp. and Optima Energy
  • ETSA Corp. retained ownership of the previous subsidiary companies of ETSA Transmission, ETSA Power (distribution and retail) and ETSA Energy (energy trading)
  • Optima Energy is the generation corporation
  • SA is a major importer of electricity from Victoria via connection to the Victorian transmission system 
Queensland
  • Queensland Electricity disaggregated into (a set of GBEs):
  • three state-owned generation businesses;
  • an engineering services business;
  • seven distribution businesses;
  • three state-owned retail businesses; and
  • an autonomous transmission entity known as Powerlink
  • Planning to interconnect with NSW and has created an interim competitive wholesale market with the intention to move towards a fully competitive market including retail deregulation by 2001.
Australian Capital Territory
  • Government owned retailer and distributor has been corporatised
  • Government has recently indicated intention to deregulate its retail market
  • Electricity supplied to the ACT is generated in NSW but participation in the NEM will also allow the ACT to source from Victorian generators.
Western Australia,

Northern Territory
  • Although signatories to NCP Agreements, WA and NT have not been party to the COAG national electricity agreements and are not therefore participating jurisdictions in the context of the NEM. 
  • WA has created a GBE, Western Power, which is ring-fenced into five entities although it continues to operate as a vertically integrated monopoly
  • WA developing its own State-based competitive market and is introducing a third party access system to both transmission and distribution
  • The NCC has indicated to Western Australia that "it is essential that electricity generation and transmission functions are structurally separate to ensure that the anticipated benefits from a more competitive electricity market are achieved. WA has advised the Council that it is currently considering this matter.

 
 
 
    1. Tasmania’s Progress in Reform
When considering reform in Tasmania in comparison to other States, the Committee considers that it is necessary to give recognition to the unique features of the Tasmania ESI. Whilst there are many common elements to the process and elements of reform in several Australian States, particularly those already forming a part of the NEM, it is not axiomatic that these features are in the best long term interest of Tasmania.
 
 

Several unique issues to consider for Tasmania are:

 2.5.1 Commitments under NCP and COAG Agreements
  Structural Review
 
  The NCP Competition Principles Agreement requires the Tasmanian Government to undertake a structural review of a public monopoly before it introduces competition to the market traditionally supplied by the public monopoly, or before it privatises the public monopoly or any part of it.
 
 

The NCP Structural Reform Principles, as contained in Treasury’s supporting information, state:
 
 

Box 1: National Competition Policy Structural Reform Principles
 
 

Clause 4 of the Competition Principles Agreement states that:
 
 
  1. Each party is free to determine its own agenda for the reform of public monopolies.

    2.  

     
     
     

  2. Before a party introduces competition to a sector traditionally supplied by a monopoly, it will remove from the public monopoly any responsibilities for industry regulation. The party will re-locate industry regulation functions so as to prevent the former monopolist enjoying a regulatory advantage over its (existing and potential) rivals.

    3.  

     
     
     

  3. Before a party introduces competition to a market traditionally supplied by a public monopoly, and before a party privatises a public monopoly, it will undertake a review into:
  1. the appropriate commercial objectives for the public monopoly;

    2.  

     
     
     

  2. the merits of separating any natural monopoly elements from potentially competitive elements of the public monopoly;

    3.  

     
     
     

  3. the merits of separating potentially competitive elements of the public monopoly;

    4.  

     
     
     

  4. the most effective means of separating the regulatory functions from the commercial functions of the public monopoly;

    5.  

     
     
     

  5. the most effective means of implementing the competitive neutrality principles set out in the CPA;

    6.  

     
     
     

  6. the merits of any community service obligations undertaken by the public monopoly and the best means of funding and delivering any mandated community service obligations;

    7.  

     
     
     

  7. the price and service regulations to be applied to the industry; and

    8.  

     
     
     

  8. the appropriate financial relationships between the owner of the public monopoly and the public monopoly, including the rate of return targets, dividends and capital structure.
  1. A party may seek assistance with the review from the (National Competition) Council. The Council may provide such assistance in accordance with the Council's work program.
A structural review of the HEC’s distribution and retail businesses has been conducted in accordance with Clause 4(3) of the Competition Principles Agreement because of the Government’s intention to privatise these businesses. This was documented in National Competition Policy, Review of the Structure of the Hydro-Electric Corporation’s Distribution and Retail Businesses, December 1997 (the Reeves-Breslin Report).

In the context of the Government’s proposal, the NCC has indicated that a structural review of the HEC’s transmission business is not required as it is a natural monopoly and is to be separated out into a stand-alone entity and regulated in a manner fully consistent with NEC. The NCC is of the view that such reviews already undertaken in other States are sufficient to meet this commitment.
 
 

A structural review of the HEC generation business is to be conducted prior to Tasmania joining the NEM. The State has confirmed with NCC its intention to pursue interconnection with the mainland grid via Basslink and therefore to enter the NEM at which time it will be considered a participating jurisdiction and as such be bound by the terms of the NCP Agreements.
 
 

It is important to note that the role of the NCC is to review proposals that are put before it, rather than to recommend a particular course of action, which is considered to be the role of the individual jurisdiction. Because of this, although it can be argued that the NCC has been satisfied with the Government’s proposal to date, it has not been presented with any alternative propositions so it can not be argued that the NCC has selected the Government’s position in preference to others.
 
 
 
 

 Structural Separation
 
  The NEM and COAG Agreements require structural separation of the generation, transmission and distribution elements of the electricity supply industry to ensure that the anticipated benefits from a more competitive electricity market are achieved. The NCC has indicated a strong view that ring-fencing these operations is insufficient.
 
 

As a condition of the State’s commitment to join the NEM, structural reform through the disaggregation of the HEC will be necessary with a minimum requirement that the transmission business be separated out by the time of entry.
 
 

The Tasmanian Government has participated in a series of Agreements at Special Premiers’ Conferences and COAG meetings that have successively committed the State to reform of its electricity sector. These are set out in the Table below:
 
 
 
 
 
 
Meeting Relevant Agreements
SPC, Brisbane 30-31 Oct 1990 Premiers agreed to set up a working group to assess benefits from an extension of, and/or organisational changes to, the electricity grid covering NSW, Vic, Qld, SA, Tas and the ACT

 
SPC, Sydney 30 Jul 1991 Premiers
  • agreed to establish the NGMC including representatives from NSW, Vic, Qld, SA, Tas and the ACT. 
  • requested more detailed technical appraisals of the proposed links to Tas and Qld for results to be made available at the Nov meeting.
 
Premiers’ and Chief Ministers Meeting, Adelaide 21-22 Nov 1991 SECV and HEC reported that there are significant potential gains from a link between the two States.

 
Heads of Government, Canberra 11 May 1992 Heads of Government:
  • agreed to develop an interstate transmission network across eastern States, and, to achieve agreed to the principles of separate generation and transmission elements in the electricity sector 
  • Tasmania’s participation in the national grid was noted to be dependent on the development of the Basslink proposal. 
 
COAG , Perth 7 Dec 1992 Heads of Government:
  • noted work on the development of an interstate transmission network 
  • reaffirmed their commitment to the principle of separate generation and transmission elements 
 

 
 
 
COAG, Melbourne 8-9 Jun 1993 Relevant Heads of Government:
  • announced a firm commitment to have the necessary structural changes in place to allow a competitive electricity market to commence from 1 July 1995 
  • confirmed their commitment to the establishment of an interstate transmission network, separate from generation and distribution interests 
  • Tasmania reserved its position pending the outcome of its current review of the structure of its electricity supply industry
 
COAG, Hobart 25 Feb 1994 Relevant Heads of Government agreed to the principles for a NEM of a uniform approach to network pricing and regulation, and a form of vesting contracts for managing the transition to a competitive market

 
COAG , Darwin 19 Aug 1994 Relevant Heads of Government noted substantial progress in structural reform to achieve a competitive market and that review of the ESI in both Tas and SA are underway with a view to structural reform consistent with the national model

 
COAG, Canberra April 11 1995 All Australian Governments reached agreement on NCP and signed the three inter-governmental agreements underpinning it (see Section 2.3, above)
 
 

Related reforms to the electricity industry established in previous SPC and COAG meetings formed part of the NCP package.

 
Leaders’ Forum Adelaide 12 Apr 1996 Leaders discussed the creation of a NEM and reaffirmed their commitment to implementing the COAG agreements

 

 

2.5.2 Legislative Reform
 
 

A package of legislation, principally the Electricity Supply Industry Act 1995 has been passed through the Tasmanian Parliament creating a framework for increased competition in the Tasmanian ESI. This Act removed the HEC’s statutory monopoly on electricity generation and transferred its regulatory and advisory responsibilities to Government Agencies, primarily the Office of Energy Planning and Conservation (OEPC).
 
 

At the same time the Government introduced the Government Prices Oversight Act 1995 to establish the GPOC to independently assess the costing and pricing policies of public monopolies (including the HEC) to ensure that monopoly power is not being abused.
 
 

GPOC makes recommendations to the relevant Ministers on the pricing of government monopoly services. Under the Act, the Minister for Energy is required to set maximum prices for electricity tariffs to retail customers for a three-year period, taking into account the recommendations from GPOC. In the context of the structure of the NEM discussed in Section 2.2, above, GPOC holds the jurisdiction responsibility in Tasmania for the regulation of transmission and distribution pricing.
 
 

2.5.3 Disaggregation of the HEC
 
 

In accordance with the requirements of the Competition Principles Agreement, the Minister for Finance commissioned a structural review of the HEC’s distribution and retail businesses, the Reeves-Breslin Report, which was completed in December 1997. This report recommended that "the distribution and retail businesses of the HEC should be carried out by separate legal entities in a competitive Tasmanian electricity market" and that "full separation be implemented prior to the introduction of competition in the Tasmania electricity market."(pxiii) This recommendation was based on the view that "… a single distributor/retailer with ring fenced functions would clearly not provide the same level of open access and retail competition and substantially lessens the chances that competitive gains in the generation sector would be passed through to consumers."
 
 
 
 

The Government rejected the Reeves/Breslin recommendation to split distribution and retail and has indicated its intention to disaggregate the HEC into generation (including system control), transmission and combined distribution/retail businesses. The Government’s decision to reject the Reeves/Breslin recommendation was based on the following views:
 
 

 The Government subsequently introduced the Electricity Companies Bill 1997 into Parliament to provide for the establishment of one or more companies (limited by shares and incorporated under the Corporations Law) for the transmission, distribution and retailing of electricity in Tasmania.
 
  … with each such company having as its primary purposes one or more of the following activities:
    1. the transmission of electricity;
    2. the distribution of electricity;
    3. the retailing of electricity;
    4. any other activity, other than the generation of electricity, related to or associated with the transmission, distribution or retailing of electricity.[s5(1)]
If the Government proposes to form such a company, Section 5(2) of the Act requires the Minister for Energy to lay before both Houses of Parliament a statement specifying –
 
    1. the intention to so form or participate in the formation of such a company; and
    2. the primary purposes of the company; and
    3. any other information the Minister considers appropriate.
Both Houses of Parliament must approve the Minister’s proposal before a company can be formed.
 
 

The Electricity Companies Act 1997 was passed by both Houses of Parliament and received Royal Assent on 22 December 1997.
 
 

2.5.4 The Government’s Plans for Further Reform
 
 

The Government has also outlined proposals to part privatise the HEC through the sale or lease of the transmission and distribution/retail businesses and to participate in the NEM through an undersea interconnector called Basslink between Tasmania and the mainland grid in Victoria.
 
 

There is a range of factors driving further reform in Tasmania from national competition policy and industry reform, including the intention for Tasmania to participate in the emerging NEM, to local drivers such as the new vision for the HEC developed by its Board. The rationale for reform in the context of disaggregation is discussed further in Chapter 5, below.
 
 
 
 
 
 
  1. The Rationale for Electricity Reform in Tasmania

    2.  

     
     
     
     

    When considering how best to approach its complex terms of reference, the PAC developed an agreed framework that analyses the rationale behind the Government’s proposed electricity reform agenda. This links the problems and issues the Government is trying to address, the means by which it is trying to address them, and the ultimate outcomes that it is seeking to achieve. This framework is illustrated and described in this Chapter.
     
     

    1. The Problems and Reform Issues
There are broadly four sets of problems or reform issues facing the State that the proposed reforms to the State’s electricity supply industry are designed to address. These are discussed in Sections 3.1.1 to 3.1.4, below. 3.1.1 Obligations under the NCP and COAG Agreements
 
 

The State has obligations through NCP commitments and the COAG reform agenda to introduce regulation and competition into its electricity market as discussed in Chapter 2, above.
 
 

 In summary these include:
 
  Other States are moving to reform in readiness for their participation in the NEM and in order to meet their commitments under these Agreements. Tasmania’s obligations under NCP are very clear if Basslink proceeds. If Basslink does not proceed these obligations, and therefore the imperatives for associated reform, are less clear. This issue is discussed in more detail in Section 5.1, below.
 
 

3.1.2 Business Imperatives for the Hydro-Electric Corporation
 
 

Evidence provided to the Committee by many witnesses indicated that there has been a compelling need to improve the efficiency of electricity supply authorities around Australia. Some held the view that there would be significant productivity and efficiency gains to be made through the disaggregation and a consequent improved business focus of the HEC.
 
 

The best argument we have in those sorts of terms at the moment is the business focus argument that, if in fact you disaggregate the units into areas of activity that have got fairly clear focus to them, rather than having to be concerned about all the integration elements, that is one of the ways of removing under-performance in those terms.
  Several witnesses acknowledged that there is a cycle to organisational change with "disaggregation and aggregation occurring from time to time, and probably at any one time some industries or some businesses are going one way and some are going the other way" it was also argued that it is change itself that is required to yield efficiency gains rather than the nature of the change.
 
 

Evidence from the HEC highlighted that, as a consequence of the changing electricity industry, nationally and internationally, and the need to improve the organisation’s business focus, change is inevitable for the HEC.
 
 

Central to the Board’s strategy for positioning the business in the changing electricity environment is the indisputable fact that the status quo is not an option for the HEC.
 
 

The end of the hydro-industrialisation era in the early 1990s and the introduction of reforms to the electricity market Australia wide in 1995 heralded a period of immense change for the HEC and its business.
 
 

Following a series of strategic planning workshops in 1996 and early in 1997, the HEC Board advised the Tasmanian government that a failure to embrace change would not just result in stagnation for the HEC as a business but in its serious decline and loss in its total value. In this environment, to stand still, or to refuse to change, is to go backwards.
 
 

 The HEC further argued that there are potential efficiency gains from disaggregation that come from breaking up the "culture of one business" and by "concentrating the efforts of management … to make sure the decisions that they are making are decisions which fit that business" suggesting that a "one-size-fits-all-approach" is not appropriate when different parts of the entity have different risk profiles.
 
 

3.1.3 The State’s Economic and Fiscal Position
 
 

The public sector finance problems facing Tasmania are considered to require greater access to revenue for the Consolidated Fund. In economic terms, Tasmania has relatively high unemployment and low growth. There is also a significant debate on the level of state debt and the State’s capacity to service this debt. These issues will be considered in detail in subsequent reports.

3.1.4 Future energy supply and risk management
 
 

Current energy demand forecasts, if correct, indicate that within three years, the total electricity load required will exceed the hydro system capability and that after nine years (the year 2005-06) this gap would grow to 100MWaverage (approximately 9% of system capability). While this could be met in the short term through a combination of demand-side management and running down the water storages, it is not a sustainable long term position, particularly in the event of lower than average rainfall or drought.
 
 

The Committee has not concluded its investigations of future energy requirements. This issue will be considered in detail in subsequent reports.
 
 
 
 
    1. The Proposed Solutions
3.2.1 The Government’s Position
 
 

In April 1997 the Premier, the Hon Tony Rundle MHA, launched the State Government’s Directions Statement which contained a package of initiatives. These include:
 
  3.2.2 The Outcomes Sought
 
 

In pursuing its strategies for economic and fiscal recovery and integrated energy development the Government put forward evidence to the Committee that it is seeking to achieve a range of outcomes. These are listed on the right-hand side of the diagram.
 
 

3.2.3 Alternative Solutions Proposed
 
 

During the course of its inquiry, the Committee has identified alternative views to those of the Government about the solutions to the problems that Tasmania faces. These views will be discussed in subsequent reports.
 
 

In the context of this interim report, there is an alternative view that structural separation of the HEC can occur by ring-fenced business units, subsidiary companies or GBEs as opposed to the fully separated companies proposed by Government. Underpinning this view is the belief that it would be more appropriate to work towards an alternative time frame which addresses the need to reform the ESI in the absence of equity withdrawal and/or Basslink.
 
 

The following diagram illustrates the discussion above including both the options proposed by Government and a range of alternative views.
 
 
    1. The Relationship Between Disaggregation, Sale/Lease and New Supply Options
The rationale for the disaggregation of the HEC’s generation, transmission and distribution/retail businesses on its own (ie without considerations of the sale/lease, new energy supply options including entry to the NEM via Basslink) arises from:
 
  When the issue of the sale or lease is brought into the picture then a further argument for disaggregation emerges in that the entities to be sold or leased must be structurally separated beforehand.
 
 

When the development of new energy options such as Basslink are also brought into the picture then it is argued that disaggregation is necessary because it allows for both the development of competition in generation and the State’s obligations under the COAG reform agenda to be fully met.
 
 

A full analysis of the reasons to disaggregate is provided in Chapters 4 and 5 below.

  1. Structural Approaches to Disaggregation

    2.  

     

    1. The Current Structure of the HEC and its Operation as a Vertically Integrated Monopoly

      2.  

       
       
       
       

      The HEC is a state owned corporation structured under the Government Businesses Enterprise Act 1995. It is a vertically integrated monopoly in the electricity supply industry in Tasmania. A single Government appointed Board manages the HEC.
       
       

      Vertical integration has in the past been the norm in the operation of electricity supply authorities in Australia. Vertical integration offers the benefit of allowing a business to maximise its economies of scale in production and overheads, thus reducing its overall costs. Indeed, in August 1993 a report submitted by Cresap Langton to a joint HEC/Tasmanian Government team examining selected aspects of a future ESI in Tasmania, proposed that:
       
       

      … the most effective longer-term structure for HEC within the Tasmanian ESI is the first option, namely a vertically integrated company. This has been selected for the following reasons:

      It provides the most easily regulated pricing environment. …

      It clearly allocates the obligation to supply. …

      It produces more sustainable competition. …

      It is the lowest cost option. …

      It is the option that best supports HEC’s improvement of efficiency. …

      It is the option that provides the best non-price benefits to Tasmania. ….
       
       

      The opposing view is, however, that vertical integration can allow significant distortion of a business’s cost structure, exploitation of its market power and reduced efficiency. It allows for the operation of cross subsidies that distort both costing and pricing of services. It is also argued that, if competition is absent, there is no external pressure (in the absence of regulation) to adopt efficient cost structures and market based pricing, as the goal of the organisation will be overall profit maximisation.
       
       

      The Industry Commission in their review of ETSA made a comprehensive study of this matter. They drew attention to a 1991 study of 74 privately owned electricity utilities in the USA that "demonstrated costs would rise by almost 12 per cent if vertically integrated firms were to be separated into generation and network enterprises". That study also noted that competition at the generation stage may also lead to gains that offset efficiency gains from vertical divestiture. In summary, the Commission accepted that "vertical separation in the ESI will mean some trade-off exists between integration economies and the benefits of competition".
       
       

      Tasmania currently only has one Generation, one Transmission, one Distribution and one Retail business. Because the Transmission and Distribution businesses are natural monopolies and, in the current HEC integrated structure, generation and retail are not contestable, the development of competition in the ESI as the means of breaking monopoly power is difficult. The alternative to the introduction of competition is the introduction of a network access regime and the regulation of prices. Regulation of prices has been recently introduced in Tasmania through the Government Prices Oversight Act 1995 (see Section 2.5.2, above).
       
       

      Evidence from the Government, based on advice received from Ernst and Young in March 1998, claimed that benefits through the elimination of cross-subsidies and other distortions would result from the disaggregation of the HEC:
       
       

      Formal separation of monopoly transmission and distribution activities from the contestable activities [generation and retail] allows the identification and removal of cross-subsidisation that may exist. Without full disaggregation an incentive exists to attribute costs to monopoly business activities away from contestable activities where costs can be recovered through regulated tariffs.
       
       

      Formal disaggregation will allow for cost reflective tariffs to be developed by the regulator. This may result in lower tariffs and/or tariffs which provide more economically efficient pricing signals to customers.
       
       

      However, specific examples of cross-subsidy were not presented to the Committee.
       
       

      Evidence from Professor Hilmer also argued the benefits of disaggregation in this context:
       
       

      … you can see competition working in generation, and there are many other areas in which it is more difficult – such as transmission - to see competition working. What you do not want is the monopoly profit in the non-competitive area being used to help one competitor or to otherwise distort what happens, say, in the competitive area – generation. If you can cleanly separate these it is going to be easiest to make sure that that does not happen and therefore there is a presumption in favour of it.
       
       

      Professor Hilmer placed a caveat on this comment by acknowledging that Australia has many quite different parts and that what you might do in Tasmania may be different.
       
       

      I think the real issue … is going to be the question of, will you have a contestable generation market in Tasmania, because if you do not, then you start to have different forms of organising a monopoly. But the competition of electricity starts with generation. If you do not produce competitive electricity through a variety of potential sources then the rest of it does not make nearly as much sense in terms of a competitive model.
       
       
       
       

      Structural change has occurred in the HEC to improve the overall efficiency and effectiveness of the organisation and cost reductions of 4% annually have been achieved in recent years.
       
       

      The 1997 Annual Report of the HEC outlined briefly its structure and response to the requirements of the NCP. The transmission business of the HEC has been ring fenced. Four operational divisions have been put in place - Generation, Network, Systems and Energy Services. The office of the Chief Executive Officer (CEO) and a Consulting Business Unit supports the four divisions.
       
       

      The changeover transition began in March 1997 with the new divisional structure taking effect from the beginning of the 1997-98 financial year. The new Divisions are to act as independent business units, reporting their financial performance in separate profit and loss accounts and balance sheets, all of which will be consolidated into a corporate report for the HEC as a whole.
       
       

      The HEC’s future strategy, had it been implemented, would have provided for diasaggregation into subsidiaries by April 1998.
       
       
       
       

    2. What is Disaggregation?
Disaggregation herein refers to the structural separation of formerly vertically integrated electricity entities. The breaking up of vertically integrated monopolies in the electricity industry is a fundamental element of the national reform of the ESI.
 
 

The proposed process of disaggregation in Tasmania is to involve the organisational and legal separation of the existing business of the HEC to form independent entities. The Government, through the Electricity Companies Act 1997, has clearly indicated its intention to disaggregate the HEC through the formation of separate companies, under the Companies Code, to own and operate one or more of:
 
 

The remaining organisation would thus become a GBE solely responsible for the generation business. 4.2.1 Vertical and Horizontal Disaggregation
 
  In proposing disaggregation consideration must be given to:
 

4.2.2 The Corporate Structures for Disaggregated Units
 
 

In addition to determining the units that are to be structurally separate, it is necessary to determine the corporate structures to be applied in operating the business units.
 
 

The alternative approaches considered by the Committee have been:
 
 
  1. ring-fencing
  2. the creation of subsidiary companies
  3. the creation of separate GBEs
  4. the creation of separate companies under Corporations Law
Ring fencing is the simplest approach to achieving separation, as it is solely an administrative arrangement. Ring-fencing entails the establishment of separate accounting and management structures to allow the identification of specific operations within the overall business. This addresses the need for separate accounting and financial information on certain key elements of the electricity businesses for the purposes of monopoly regulation. Currently the HEC is a fully ring-fenced organisation.
 
 

The creation of subsidiary companies is an option involving creation of separate legal entities, which are owned and controlled by the Board of the parent company. Each subsidiary has its own Board. Board members are appointed by the Board of the parent company and are accountable to it.
 
 

The creation of separate GBEs would involve the disaggregation of the three businesses and creation of Transmission and Distribution/Retail as separate GBEs under the GBE Act each with its own Board. This would require new Portfolio legislation for two new GBEs as well as enabling legislation to allow rearrangement of assets and liabilities.
 
 

Creation of separate companies under Corporations Law entails total separation of each business and formation of separate Boards and operating arrangements. Separate companies under Corporations Law achieve the maximum degree of separation. The Boards of separate companies are accountable to their shareholders.

 The diagram below illustrates the current structure of the HEC and the alternative corporate structures possible through disaggregation where G = Generation, T = Transmission, D = Distribution and R = Retail. It also illustrates the Government’s disaggregation proposal, which is discussed further in Chapter 5.
 
 
 
 


 
 
 
 
 
 

Section 4.4 provides a detailed comparison of the operational characteristics and other aspects of the three corporate structures illustrated above.
 
 
    1. The Scope of Disaggregation

The HEC is currently a single vertically integrated GBE, which has recently ring-fenced its generation, transmission, distribution and retail businesses. This Section considers the extent to which these four component businesses should be further horizontally or vertically disaggregated.
 
 

4.3.1 Generation
 
 

As highlighted briefly in Section 4.1, above, the Committee has heard much evidence to suggest that it is the generation business that is the business in which competition can, and should, be introduced. This issue will be considered in depth in subsequent reports.
 
 

Evidence presented to date indicates that there is difficulty in splitting generation into smaller units due to the loss of system performance and conflict between storage and run of river systems. The issue for Tasmania is the fully integrated nature of the hydro system that makes it difficult to split up the system.
 
 

In contrast, the Nixon Report recommended that consideration be given to splitting HEC’s generation business into five competing firms, with the basis of such a split to be the five major catchment areas of the current system. Nixon acknowledged, however, that objections to arranging such a split would include loss of coordination, loss of supply security, loss of critical mass and the possibility of the two businesses which dominate storage capacity to ratchet up the price in situations of low rainfall.
 
 

Finding 1

The Committee believes at this stage that formation of a single generation business is appropriate, but it has not ruled out consideration of horizontal disaggregation at a later stage.
 
 

4.3.2 Transmission
 
 

Transmission is seen to be a natural monopoly thus not suited to any horizontal disaggregation. This was confirmed by all other states reviewed. In addition, the NCC has considered the issue of structural separation of the transmission business from generation in other states and recognises the merit of a single transmission business. There is not seen to be any requirement for a structural review prior to separation. This conclusion by the NCC is based on the efficacy of the model in other states where it has already been applied.
 
 

Finding 2

The Committee concluded that formation of a single transmission business is appropriate.
 
 
 
 

4.3.3 Distribution and Retail
 
 

The structure of the distribution and retail business was considered in the Reeves/Breslin report, which found that there was no scope to horizontally disaggregate the retail business due to loss of scale. However, as outlined in Section 2.5, the Reeves/Breslin report did recommend the structural separation of distribution and retail at the time of entry to the NEM. The reasons for this recommendation related to the small size of the Tasmanian market.
 
 

The Committee had evidence from several distribution/retail businesses which all indicated that there were substantial economies of scale in the retail business. It was suggested that the ideal scale was around 1.5 million customers. In this setting, the long-term viability of many retail/distribution companies currently operating would be in doubt.
 
 

In evidence, the NCC advised that it would not be formally assessing its level of satisfaction with the structural review of distribution and retail until it receives a report from Tasmania in the next month. However, on 6 April the Committee requested the Government to seek urgent advice from the NCC on the proposed structure of the retail and distribution businesses in Tasmania to assist in the preparation of its interim report.
 
 

The President of the NCC, Mr Graeme Samuel advised the Government in correspondence dated 8 April that, although he could not provide comments endorsed by the Council, he had sought and provided the views of the NCC Secretariat on the matters raised. In relation to retail/distribution separation, these views were:
 
 

 A formal response from the Council is expected to be forthcoming before the end of April. If the NCC is not satisfied with the Government’s proposal for some of the reasons set out in the Reeves/Breslin Report then the Government will have to consider alternatives such as establishing separate retail and distribution businesses or further consider the options within the Reeves/Breslin report.
 
 

Finding 3

The Committee noted:
 
  The Committee noted the NCC Secretariat’s views on the separation of the distribution and retail businesses.
 
 

The Committee considered that, provided the Government is able to demonstrate that there is a clear public interest in retaining an integrated distribution/retail entity upon introduction of the retail market, there should be no impediment to doing so.
 
 
 
 

4.3.4 Other Observations
 
 

The transmission business has a regulated financial return. It is focussed on asset management, which is considered to be low risk. It is sophisticated in terms of technology and it is subject to a major $500 million reinvestment program over the next ten years. This investment is major in national terms, relative to the network size. The Committee, in gathering and considering evidence, expressed concern about the need for this investment. The projected annual investment was, in broad terms, equivalent to the current total annual revenue of the business. The Committee will report on this issue in greater detail in subsequent reports.
 
 

The generation business also has a focus on asset management but has significant risks to manage. The risk exposure of this business in entering the NEM or another competitive environment is high. Evidence from witnesses associated with the generation businesses in both NSW and Victoria pointed out the risks inherent in the generation business with a movement to participation in the NEM. The Hogg Report addressed the issue of risk in some depth at Section 5.6. The evidence on the new risks is strong and would require significant change and new skills on the part of the HEC to effectively manage in the new competitive environment.
 
 

The distribution/retail business is significantly different to the previous two. Entry to the NEM will bring the need to introduce contestability for retail customers (see Section 5.2, below). The timetable for this change is yet to be established in Tasmania. Other States have set various timetables, which would see all customers as being contestable from July 1999 to January 2001.
 
 

On the basis of evidence from other states, the introduction of retail customer contestability in Tasmania will require major change on the part of the existing HEC retail business.
 
 

Existing private and public sector operators already in place in Victoria and NSW are likely to be better equipped and more experienced in competitive markets than is the existing HEC business unit. It is evident from other retail companies that there would be some interest in entering the Tasmanian market. This risk is likely to be better managed through ensuring a longer lead-time for preparation on the part of the HEC.
 
 

Evidence from existing retail/distribution businesses in Victoria suggested that the market size of Tasmania would preclude any major new retailer entering. However, there is risk of interstate retail businesses "cherry picking" larger customers which can be serviced at low cost. Powercor (a Victorian retailer) has made major inroads in the NSW electricity industry, building its market share of contestable business to around 16% in a short period of time. Thus there are market threats to the present business which will emerge with the introduction of contestability.
 
 
    1. Comparison of Corporate Structures
4.4.1 Operational Characteristics
 
  GBE Owned subsidiaries formed under Corporations Law GBE Wholly Government Owned Private Company Under Electricity Companies Act 1997
Current examples of structure Nil HEC and all other GBEs Nil under Act at present.
 
 

TT-Line and four ports Corporations are all private companies in similar situation to the proposed businesses
Appointment of directors HEC Board Governor on recommendation of Portfolio Minister Shareholders (currently two Ministers)
Duties of Directors Boards of subsidiaries are accountable to the Board of the GBE

The duties of the GBE Board are prescribed by GBE Act. Similar to Corporations Law

 

 Prescribed by GBE Act. Similar to Corporations Law Corporations Law provisions - subject to ASC scrutiny
Capacity for policy direction from Minister/Shareholder As for GBEs – the provisions for a Ministerial Charter and Ministerial directions extend to the subsidiary through the Board of the Parent GBE.
 
 

The use of powers of direction is tempered by the capacity for all or some of the Directors of a Board to resign if the direction is not seen to be in the interests of the GBE.
 
 

The corollary is that the Minister (through the GBE Board) can seek to remove the members of a subsidiary Board if that Board fails to comply.

 Act provides for Ministerial Charter giving broad policy expectation of GBE

[GBE Act S36-38]
 
 

Act provides capacity for Minister to give direction to Board on long term objective for GBE and on any issue where draft corporate plan is inconsistent with Ministerial Charter to the extent of the inconsistency

[GBE Act S40(2)]
 
 
 
 
 
 
 
 

Act provides for joint directions from Stakeholder and Portfolio Ministers on financial performance objectives.

[GBE Act S40(3)]
 
 

Act provides for directions relating to performance of CSOs [GBE Act S65]
 
 

The use of powers of direction is tempered by the capacity for all or some of the Directors of a Board to resign if the direction is not seen to be in the interests of the GBE.
 
 

The corollary is that the Minister can seek to remove the members of a Board if the Board fails to comply.
 
 

These powers can be seen as a less explicit control than private company.

The Portfolio Act can prescribe further conditions.

 Within the limits of the legislation, the shareholders can give direction to the Board by a special resolution at a general meeting of the Company.
 
 

Potentially greater control over direction than GBE due to scope for explicit direction 
 
 

The use of powers of direction is tempered by the capacity for all or some of the Directors of the company to resign if the direction is not seen to be in the best interests of the company.
 
 

The corollary is that the shareholders can remove the Directors of the company if the Directors fail to comply.
Requirement to inform Minister/Shareholder and reporting As for GBE Act Fully addressed in GBE Act – wide ranging coverage.
 
 

Annual report to be tabled within five months of end of financial year and must include prescribed information and be subject to Parliamentary scrutiny [GBE Act S55-56] Can also be subject to the provisions of the Freedom of Information (FOI) Act

 Schedule 1 Part 2(6) requires company to provide information on request and is incorporated in Memorandum and Articles of Association.
 
 

Reporting obligations can be established in Memorandum and Articles of Association, which then binds the Company. Also covered by Corporations Law
Payment of tax equivalents Covered by GBE Act through consolidation of HEC Covered by GBE Act GBE Act provisions applied by operation of S14 of the Electricity Companies Act 1997
Payment of dividends Covered by GBE Act through consolidation of HEC Covered by GBE Act.
 
 

Dividend can be up to 100% of after tax profit without reference to Parliament. Special dividend in excess of after tax profit can be directed but subject to Parliamentary motion.

 

 Corporations Law provisions apply. Dividends must be paid out of profits. 

To go beyond this would involve a reduction of capital, which is limited by Corporations Law to very specific situations requiring Supreme Court approval.
 
 

Memorandum and Articles of Association can prescribe the process for setting dividends and limit the level of dividends that can be paid.
Capacity to borrow Controlled by provisions of GBE Act Controlled by provisions of GBE Act Controlled by provisions of Electricity Companies Act 1997 and can only borrow through Tascorp unless Special Resolution of Parliament varies this.
Loan Guarantee Fees Controlled by provisions of GBE Act Controlled by provisions of GBE Act Same as provisions of GBE Act applied by virtue of S13 of Electricity Companies Act 1997
Community Service Obligations As for GBE Provisions of GBE Act set the framework for funding CSOs but there is no obligation for Government to explicitly fund these.
 
 

CSOs are usually absorbed by the GBE within its operational costs.

 S19 of the Electricity Companies Act 1997 provides for agreements with the Minister (with approval of Board and Treasurer) to perform activities.
 
 

Explicit contract for services and payment would be required.
Accountability to Parliament As for GBE Must not dispose of main undertaking without consent of Parliament [GBE Act S10(7)-(9)]
 
 

Charter must be tabled [GBE Act S36]
 
 

Audit provisions [GBE Act S54]
 
 

Annual reporting provisions [GBE Act S55-56] including information on any directions given to board by Minister.
 
 

Objection by GBE on Ministerial direction to perform CSOs to be tabled if direction is not withdrawn following the objection

[GBE Act S65(7)]
 
 

Direction for payment of special dividends to be approved by Parliament [GBE Act S86]
 
 

HEC also bound not to deal with electricity generating assets or associated land without Parliament’s consent under HEC Act 1995.

 Company cannot be formed without consent of Parliament and Parliament can seek to obtain information through the Ministerial statement of information under S5(2) of the Electricity Companies Act 1997.
 
 

No capacity to sell shares or assets as prescribed under Electricity Companies Act 1997.
 
 

Obligations relating to reporting and provision of information depend on the provisions of the Memorandum and Articles of Association.
 
 

Special resolution requiring Parliament’s approval required to borrow from source other than Tascorp
 
 

Once established Memorandum and Articles of Association cannot be varied without the consent of Parliament as covered in Electricity Companies Act 1997 Schedule 1, Part 1 (1)

 
 
 
 
  4.4.2 Issues Relating to the Disposal of assets/businesses
 
  GBE Owned subsidiaries formed under Corporations Law GBE Wholly Government Owned Private Company Under Electricity Companies Act 1997
Capacity to sell/allot or offer shares No limitation unless the subsidiary operates a main undertaking in which case the approval of Ministers and Parliament required 

[GBE Act S10(7)-(9)]

 Not applicable Not permitted 

Electricity Companies Act 1997 S20(1)

Electricity Companies Act 1997 S20(2)(a)-(c)
Capacity to sell assets  No limitation unless main undertaking which requires Parliamentary approval

[GBE Act S10(7)-(9)]

 No limitation unless main undertaking which requires Parliamentary approval

[GBE Act S10(7)-(9)]

 Not permitted 

Electricity Companies Act 1997 S20(3)(c)

4.4.3 Establishment phase for structure with existing assets in HEC
 
  From GBE to Subsidiary From HEC to other GBE From GBE to Private Company
Transfer of Major Assets Within power of Board subject to approval of Minister and agreement of subsidiary [GBE Act S10(1)] except for electricity generating plant, dams and associated works for hydro power generation and associated land which require Ministerial approval and consent of Parliament. [HEC Act 1995 S7]
 
 

Restriction on dealing with powerlines removed in 1997 amendment Act

 Requires new Portfolio Act and other enabling legislation Requires Treasurer’s approval following consultation with HEC Board 
 
 

No authority exists to create private company to undertake activities other than transmission, distribution and retail.
 
 

Restriction on dealing with powerlines removed in HEC Amendment Act, 1997

 
Transfer of Other Assets/Liabilities Within power of Board subject to approval of Minister and agreement of subsidiary [GBE Act S10(1)] Requires new Portfolio Act and other enabling legislation Requires Treasurer’s approval following consultation with HEC Board.
Allocation of Debt No limitation Requires new Portfolio Act and other enabling legislation Requires Treasurer’s approval following consultation with HEC Board.

  1. Rationale for the Disaggregation of the HEC
Six sets of reasons for the disaggregation of the HEC have been presented in evidence to the Committee. These are:
 
 
  1. The obligations of NCP and COAG agreements
  2. The development of competition in the ESI
  3. The business imperatives for the HEC
  4. The proposed entry of Tasmania to the NEM
  5. The need for certainty on the part of Basslink investors
  6. Sale/Lease of the transmission and retail/distribution businesses
The rationale and validity of each of these reasons is discussed in Sections 5.1 to 5.6, below under three separate headings:
 
 
 
 

5.1 The obligations of NCP and COAG agreements

5.1.1 The Need to Disaggregate
 
 

The State’s obligations under the NCP and COAG agreements were discussed in some detail in Chapter 2, above.
 
 

In its First Tranche Assessment, the NCC noted that no specific reforms were required by Tasmania to meet the COAG electricity agreements, as Tasmania was a "non-participating jurisdiction". Tasmania received a positive assessment on its overall program for NCP reform. The NCC stated in its summary:
 
 

Tasmania has given strong commitment to the NCP reform process, developing comprehensive programs for the application of competitive neutrality policies and the review and reform of anti-competitive legislation. It has introduced competitive neutrality principles in all of its significant government business enterprises and has gone further than most other governments in stating that it will extend application of competitive neutrality reform to all business enterprises, regardless of their size, and to significant government business activities.
  The NCC also advised, in evidence from its Chairman, Graeme Samuel, that while Tasmania is not interconnected to the mainland grid, it has participated in the relevant COAG agreements in contemplation of joining the NEM. Therefore, if Basslink does not subsequently emerge as a viable alternative, Tasmania may still be bound to the reform processes established and there would be pressure to continue the process of disaggregation. In evidence to the Committee, the Executive Director of the NCC stated:
 
  The Council has not yet looked closely at exactly what Tasmania’s obligations are if Basslink does not proceed. Certainly its view is that once Tasmania is interconnected, Tasmania is obliged to meet all the obligations in the electricity agreement. Its obligations if Basslink does not proceed are somewhat more ambiguous. As I say, Council has not looked at it but there is an argument there that Tasmania, nonetheless, has made a commitment to structural reform in line with the national model.
  In its review of the sequence of COAG agreements, the Committee found that Tasmania has been an active participant in meetings since 1990 relating to formation of a NEM. (See Section 2.5, above) The potential for an interconnection, now known as Basslink, has been signalled since 1991. The level of Tasmania’s commitment has been maintained in the course of those discussions, subject to various review processes.
 
 

Because of the accumulating effect of these commitments, the Committee formed the view that successive Governments may have prematurely and unnecessarily committed the State to these electricity agreements.
 
 

XXX Insert quote from p.29 of Samuel Willett evidence re ambiguity.
 
 

XXX Insert para on the fact that the Committee considers the Government to have made unnecessary commitments/acted prematurely
 
 

Finding 4

The Committee found that:

 5.1.2 The Appropriate Corporate Structure
 
 

Neither the Government nor the HEC sees ring fencing as a viable choice to achieve structural separation of the various business units. This approach is presently being used in WA, and has received severe criticism from the NCC as it is not seen as adequately compliant with NCP commitments. In its recent assessment of Tasmania the NCC stated that:
 
 

… the Council considers that it is essential that electricity generation and transmission functions be structurally separated to ensure that the anticipated benefits from a more competitive electricity market are achieved. The Council's strong view is that ring-fencing these operations is insufficient.
 
 
  Finding 5

South Australia elected to create several subsidiaries in disaggregating its vertically integrated authority in 1995. The Industry Commission in its report to the SA Government closely examined this structure.
 
 
 
 

The Industry Commission commented in its conclusions in relation to the use of subsidiaries in South Australia:
 
 

... the Commission is not convinced that the current structure is sufficient to promote competition or that regulation can be an effective alternative. The Commission believes it is not possible for ETSA’s subsidiaries to act independently whilst at the same time availing themselves of the economies of scale and scope of a vertically integrated structure. As long as the holding corporation is responsible for the whole business and conflicts of interest exist between the subsidiaries, the current structure contains the incentive and the scope for anti competitive conduct while aggravating the problems of regulating transmission and distribution.
  The NCC, in assessing the use of subsidiaries in South Australia concluded that the structure was not considered satisfactory in meeting the goals of structural separation for the NCP electricity agreements on the NEM. In this light, use of subsidiaries may give rise to threats to future NCC assessments of reform in the Tasmanian ESI once it enters the NEM and threaten tranche payments. This issue has arisen recently in relation to the perceived slow process of reform in the Western Australian ESI.
 
 

In evidence from the Chairman and CEO of the NCC the question was put as to the NCC’s attitude to complete structural separation of transmission, whilst leaving the remaining elements (distribution and retail) as a subsidiary of the former vertically integrated authority. The NCC Secretariat indicated this structure is not appropriate in the NEM environment. (See Section 5.4.2 for further detail).
 
 

Finding 6

The Committee concluded that:

5.1.3 Timing Issues
 
 

 Evidence from Mr Ed Willett, Executive Director of the NCC stated that:
 
  Tasmania has said that it is going to be part of the NEM and it is going to build Basslink. In that context it has also said it is going to meet its obligations under the electricity agreement. The Council says, ‘Yes, that’s consistent with your obligations’. The Council would really see it as a matter purely for Tasmania to determine what the timing of that structural reform would be. Now if you are suggesting that may not be appropriate if Tasmania does not become involved in the NEM, well that is not a question the Council has addressed and the Council sees no need to address it.
 
 
  Finding 7

The Committee found that, outside NEM connection, there were no specific obligations under the NCC and COAG Agreements in respect of the timing of disaggregation.
 
 
 
 
 
 

5.2 The Development of Competition in the ESI

In this report, significant reference has been made to competition. In the ESI, it is necessary that there is competition in both the generation and retail sectors to achieve a fully competitive market.
 
 

The Reeves/Breslin report provided a comprehensive view of the issue of competition in the distribution/retail sector. The conclusions of that report were discussed in Section 2.5.3. A principal conclusion was that the small size of the Tasmanian market did not make it feasible to create retail competition in the same manner as has occurred in other States. It has been noted in Chapter 4 that development of competition in generation is extremely difficult within the constraints of the existing hydro generation system.
 
 

It is evident that, given Tasmania’s generation industry structure and small market size, there are significant barriers to the establishment of a fully competitive market for electricity. At this stage the principal objective of Government is to establish a new electricity supply source (proposed to be Basslink) as the initial step in developing competition.
 
 

The reality in Tasmania for the next four years, and quite possibly much longer, is that the State will not be connected to the NEM and therefore cannot benefit from the competitive forces of that market. As Professor Hilmer indicated to the Committee (quoted in Section 4.1) jurisdictions can have different circumstances and the driving force behind strong competition is at the generation level.
 
 

The Tasmanian ESI is not currently subject to competition in either generation or supply although there is limited competition among energy sources such as electricity, wood, bottled gas and oil for various domestic and industrial uses. Potential sources of competition at the generation level in Tasmania exist with offshore gas, wind, new hydro generation, and splitting the existing hydro generation structure, although as previously discussed, the latter option would be very difficult.
 
 

Given the limited likelihood of any of these alternative generation sources coming to fruition in the immediate future, it is clear that the benefits of competition to Tasmania are limited relative to the rest of Australia.
 
 

There is, however, scope to create the conditions for contestability or the threat of competition as opposed to the actual existence of competition. The work undertaken in past reforms, outlined at Section 2.5.2, creates the conditions for contestability and further disaggregation of the vertically integrated HEC will improve the conditions for contestability due to greater transparency in pricing and costing.

5.2.1 The Need to Disaggregate
 
 

In both NSW and Victoria a major process of disaggregation of the formerly vertically integrated electricity supply businesses was undertaken to create competition and endeavour to provide benefits to the community. Queensland and SA are going through the process of developing competitive markets at present.
 
 

Evidence to the Committee suggested that, in Victoria, the existence of significant over capacity in generation has resulted in prices being driven down through competition amongst generators. Privatisation and the accompanying development of a wholesale pool and complementary trading arrangements have improved generator utilisation.
 
 

Efficiencies were realised in the retail and distribution systems, but not of the magnitude emerging from generation.
 
 

At present, wholesale prices are so low that it was the view of some witnesses that at some point one generator may drop out of the market. In discussion on future energy prices, Dr Vertigan commented:
 
 

We are now in the very early days of a national marketplace. We have got some very perverse prices that are being generated by the operation of the structure in its very early days.
  It was the view of most witnesses that power prices were presently low due to oversupply and, over time, prices would rise as surplus capacity was utilised. However, it was the view that the price would settle at the price for new entry generation capacity.
 
 

In submissions to the Inquiry, industry participants emphasised the benefits of competition and urged that the Government address the need for competition immediately.
 
 

For development of competition, industry witnesses saw that either Basslink or an alternative electricity generation source such as gas was necessary.
 
 

In order to introduce competition in Tasmania without Basslink, it would appear that further disaggregation of the HEC would be necessary. However, it is doubtful that, given the industry structure, the nature of the hydro system operations and the size of the market, effective competition in generation or retail could be developed. Breaking up the system for the benefits of a competitive market could create high transaction and operating costs, potentially offsetting any economic benefits from competition.
 
 

On the matter of the need to disaggregate Dr Vertigan argued:
 
 

… if we believed everything that the companies told us in this industry we would not know where we would quite end up. There is a very interesting gaming situation going on, many of them would prefer to have less competitors – and you mounted the argument in terms of economies of scale, but let me tell you that most of them will give you an economies of scale argument but what they really want is less competition because in fact that gives them the capacity to keep prices up. So we are intent on maintaining a high level of competition because in fact that will drive both costs down and keep prices down. There is a very good reason for that.
  Finding 8

The Committee found that:

 5.2.2 The Appropriate Corporate Structure
 
 

The rationale under 5.1, above also applies to the development of competition in the ESI. The Industry Commission (IC) and NCC assessments of South Australia’s disaggregation into subsidiaries implied that subsidiaries were not appropriate to the development of competition because of the potential lack of transparency between the subsidiaries which could lead to conflict of interest and the scope for anti-competitive conduct.
 
 

The IC report on South Australia questioned the independence of subsidiary structures and commented that "The current subsidiary structure [of ETSA] involves significant conflicts of interest." The principal issues emerging were the existence of conflicting objectives within a subsidiary structure and reduced business focus. The IC argued as follows:
 
 

As a holding company, by definition ETSA Corporation has some powers of direction over the subsidiaries and hence could influence their actions. The interaction between the ETSA boards is strengthened by the high degree of cross membership between them. The practical reality is that as long as ETSA Corporation has residual powers, including the ability to approve investment, the subsidiaries cannot be said to be independent. ETSA Corporation owns the subsidiaries, hence legal separation cannot mean operational and financial independence.
 
 
 
 

The cross membership between the ETSA Corporation board and the subsidiaries means a high degree of shared knowledge about each other’s business plans and operations. For instance, the CEO of ETSA Corporation sits on all boards, and could be in a position of knowing beforehand about potentially competing investment proposals in generation or retail. This represents a possible conflict of interest.
 
 

 Finding 9

The Committee noted that:

 5.2.3 Timing Issues
 
 

Further evidence presented by Professor Hilmer noted that the process of disaggregation would in itself be a sound first step in Tasmania to create potential for competition. If the State waits for the right time to disaggregate to achieve competition, the mere fact of waiting will delay ideas for competition.
 
 

Finding 10

The Committee found that there was some evidence to suggest that the sooner disaggregation is achieved the sooner some competition can be introduced into elements of the Tasmanian ESI.competition can be introduced into the ESI, however minimal it might be initially.
 
 
 
 

5.3 Business Imperatives for the Hydro-Electric Corporation

5.3.1 The Need to Disaggregate
 
 

The HEC, in presenting its submission to the Committee, summarised its case by emphasising that disaggregation is an essential step towards the following business objectives:

 In evidence presented to the Committee Dr Norton, CEO of the HEC, presented the following arguments on the business reasons for disaggregation: The Committee also heard evidence to suggest that disaggregation of the HEC would allow its single business culture to be dismantled thereby improving efficiency and allowing for transparency in the costing and pricing of services. Mr Stephen Blanch of Eastern Energy argued:
 
  I am strongly of the view that there is [an advantage of separating out the transmission and distribution businesses], because one of the things I have recognised is that they are quite different businesses. We are talking about manufacturing – which is the generation – we are talking about basically highways, if you like, and then we are talking about streets, and they are very different. Vertically integrated, I worked in one [SECV] for 30 years, we never had a core focus. We never knew that we were in five or six or eight different businesses. We struggled for years to try to work out where the priorities were, how you allocate management attention, how you do the things you have to do, and they are different demands. Transmission is a bit in the middle. It certainly does not fit generation. Generation is a wildly different business to distribution and customer service. It does not matter how hard you try, there is no affinity between a power station or a manufacturer and a retail customer, and they are quite radical.
  This issue was further discussed in Sections 3.1.2 and 4.3.3, above
 
 
 
  Finding 11 The Committee found that the strongcurrent imperatives to disaggregate the HEC include: 5.3.2 The Appropriate Corporate Structure
 
 

The HEC, in its initial advice to government in September 1997, proposed three subsidiaries be formed to cover the three major businesses identified above. In making this choice, the HEC argued that, through the Board’s vision, there was a sense of urgency to achieving separation in the short term (ie by March/April 1998). In this setting subsidiary companies were the most appropriate transition to achieve within the time frame. The HEC also commented that organisational development issues, in particular the need for cultural change, were factors considered at the time with the view that this would be phased in through a subsidiary approach.
 
 

Minutes from the HEC Board meeting on 17 September 1997 list the advantages of a subsidiary approach as follows:
 
 

This option has the significant advantage over alternatives in limiting the serious risks arising from a number of important implementation issues relating to matters including:- In evidence to the Committee in March 1998, the HEC advised that it had changed its view on the preferred model from the subsidiary structure to that of the separate companies. In making this change, it was indicated that the long-term view of the HEC was to move from vertically integrated through subsidiary to separate companies. Due to lapse of time, the intermediate step of subsidiary was no longer seen as valid.
 
 

The Committee felt that the HEC’s change of view was strongly influenced by the Government’s electricity reform agenda and intention to proceed with equity withdrawal from the Transmission and Distribution/Retail businesses.
 
 

Finding 12 The Committee found that: The Committee formed the view that either structure had the potential to yield efficiency gains and reduced monopoly power in comparison to the current HEC structure but that separate companies had the potential to yield greater gains in this sense than did subsidiaries.

5.3.3 Timing Issues
 
 

It is the view of the HEC that, had its original strategy for subsidiaries been implemented in mid 1997, the new companies would be operating by March/April 1998. Due to the delay in determining the Government’s position on this issue, the HEC argued that the subsidiary phase was no longer appropriate and action should be taken to enable the start of the new companies by 1 July 1998. In establishing this position, emphasis was placed on the work already in train to create the new entities and the major staff commitment to the change. The failure to continue on the current path was seen to be a major risk for the organisation and contains the potential to result in the loss of key staff.
 
 

The Government wishes to see the new structures established as soon as possible.
 
 

Finding 13 The Committee considers that if the Parliament supports the process of disaggregation then the process of company formation should continue in line with the HEC timetable, which seeks to establish the companies to commence from 1 July 1998.
 
 
 
 
 
 

5.4 The proposed entry of Tasmania to the NEM
 
 

The viability and appropriateness of the proposed Basslink development is to be fully explored in subsequent reports. As noted previously, the Committee has not yet had sufficient evidence to draw any conclusions on the viability of Basslink. Therefore, fFor the purpose of this section of the report, the discussion is limited to whether the proposed development of Basslink is a legitimate driver forrequires disaggregation to occur.

5.4.1 The Need to Disaggregate
 
 

The construction of Basslink and the consequent entry to the NEM was addressed in a paper prepared by the Department of Treasury and Finance, Tasmania entitled "The Structural Separation of the Hydro Electric Corporation – National Competition Policy Implications".
 
 

In that paper, four issues underpinning the need for disaggregation were set out, all of which are contingent on the decision to enter the NEM via Basslink.
 
 

 In order to satisfy the requirements of COAG agreements on the NEM the Tasmanian Government must ensure that:
  These points were assessed by the Treasury and contained in its NCP Progress Report for the period April 1995 to July 1997.
 
 

In considering entry to the NEM and the opportunity for competition in the ESI within Tasmania, the information on change in other States (detailed in Section 2.2 and 2.4, above) shows that sophisticated market structures are being established. The process of development in Victoria shows that a lead-time is necessary to prepare participants for operating in a competitive market.
 
 

The HEC in its evidence placed emphasis upon the need to prepare for competition. Evidence from Professor Hilmer supported the need to create signals for competition such as disaggregation as this gave the appropriate indications of the emergence of a competitive industry.
 
 

Finding 14

The Committee found that:

 5.4.2 The Appropriate Corporate Structure
 
 

The evidence from other States and the NCC indicates that the use of a separate company for transmission is essential for entry to the NEM if there is to be compliance with COAG agreements.
 
 

The NCC was asked by the Committee to provide advice on various corporate structures and the extent to which these satisfied COAG agreements within the NEM. The advice from the NCC Secretariat was:
 
 

First, the Secretariat does not consider that a subsidiary company with transmission as one subsidiary and distribution/retail as the other subsidiary satisfies Tasmania’s COAG commitments to electricity reform;
 
 

Second, the Secretariat does not consider that a subsidiary company with generation as one subsidiary and distribution/retail as the other subsidiary satisfies Tasmania’s COAG commitments to electricity reform; and
 
 

Third, a decision by the Tasmanian Government to create an integrated generation/distribution/retail entity or an integrated transmission, distribution and retail entity is contrary to the recommendations of the clause 4 review which recommended separating distribution and retail.
 
 

 On the basis of that advice the Committee concluded that separate transmission and distribution/retail entities was necessary. However, the concerns expressed earlier on the potential for the distribution/retail entity to thwart competition remain a risk in this structure.
 
 

The structure of businesses either in the NEM or potentially entering are private companies in Victoria and State Owned Enterprises in NSW, SA and Queensland with potential that some of these will be privatised at some point.
 
 

Finding 15

 The Committee concluded that operators in the NEM are structured as both GBE and privately owned company models. The use of either separate company or separate GBE models for Tasmania is a matter of choice.

5.4.3 Timing Issues
 
 

The Committee had cause to examine the need to disaggregate the HEC at this time, given that the connection to the NEM would not occur until Basslink was installed by around 2001-2002.
 
 

The timing of change to meet the requirements of the NEM is within the choice of the State as stated by the NCC. The connection is likely to take at least four years; thus the need to disaggregate now is not a major pressure.
 
 

The major issue is ensuring that the new corporate entities have sufficient time to establish their business operations, systems and organisation structures to meet the pressures of competition. The timeframe for change in other States shows that disaggregation preceded the development of a competitive market although the timeframe varies among States.
 
 

Victoria and NSW have developed internal competitive markets for generation over periods of one to two years. Contestability limits for customers have been phased in over a period of three or four years. Queensland has an internal electricity market in development and will have an operational link by around 2001 thus allowing a development phase of around 3 years. South Australia has an operational interconnection to Victoria and is developing a link to NSW.
 
 

NSW and Victoria commenced NEM1 (involving trading across the two states) in May 1997, having previously established internal wholesale markets.
 
 

Finding 16

Evidence indicated that a reasonable lead-time is necessary to allow entities to prepare for competition in the NEM. It is suggested that around two years prior to connection would be an appropriate period.

 .
 
 

5.5 The Need for Certainty on the Part of Basslink Investors

5.5.1 The Need to Disaggregate
 
 

The development of Basslink is proposed to take place on the basis of a private developer investing in and operating the link. The viability and appropriateness of the proposed Basslink development, including the extent of private and public sector investment, is to be fully explored in subsequent reports.
 
 

In its submission, the Government put forward a number of arguments on the matter of disaggregation providing certainty for Basslink investors. The Government sees that disaggregation by mid 1998 would reduce the risk and therefore increase the certainty for potential investors.
 
 

In evidence Mr Challen expanded on the issues underpinning the needs of Basslink investors noting that investors need to be in a position to be able to negotiate separately with the generation and retail entities in Tasmania and very likely in Victoria to provide the contractual underpinning for the project.
 
 

The Committee was not in a position to speak with investors to validate these assertions but will be doing so when taking further evidence.
 
 

Finding 17

The Committee acknowledged the Government’s view that investors working on a major investment require certainty on the system in which they would have to work. There areFailure to disaggregate which a developer may be seen by an investor as an obstacle to committing funds., in particular, the issue of disaggregation
 
 

5.5.2 The Appropriate Corporate Structure
 
 

The Committee has considered three structural options for the separate business units, separate companies, separate GBEs or subsidiaries of the HEC.
 
 

In his evidence Mr Challen observed that
 
 

It [the choice between subsidiary companies or separate stand-alone companies] is a matter of degree. I accept that. It might well be the case that Basslink proceeds with a subsidiary structure. I think it is a reasonable objective to provide a Basslink developer with the tidiest view of the Tasmanian electricity supply industry that you can.
 
 

… What I think a developer does is he looks at the collection of arrangements in which he is going to have to make his investment.
 
 
 
 

… Some of the potential developers will look at it and will say, ‘There’s this list of pluses and there’s this list of minuses’, and maybe the subsidiary structure might be some way down the ranking of the list of minuses. Whether it is a deal breaker on its own at the end of the day I would not be prepared to say, but probably not.
 
 

 The option of GBEs was not explored in depth at the time of the above comments from Mr Challen. However, the Committee was not persuaded that there were substantial differences between the options in relation to this objective of Government in undertaking disaggregation.
 
 
 
 

Finding 18

The Committee concluded in providing certainty for potential Basslink investors that:

 5.5.3 Timing Issues
 
 

The Basslink project team has been established. Given the lead-time for development, there needs to be early decision making if it relates to improving the project’s feasibility.
 
 

The Government submission stated that the cost of delaying the structural separation of the HEC would be the deferral of private sector interest in the construction and operation of Basslink.
 
 

Finding 19

The Committee considers that the early action to form the newdisaggregate would be important company to facilitate genuine expressions of interest in the development of the Basslink project.
 
 
 
 

5.6 Sale/Lease of the Transmission and Retail/Distribution Businesses

5.6.1 The Need to Disaggregate
 
 

The Government has indicated its intention to withdraw equity from the HEC through the sale or lease of its transmission and retail/distribution assets
 
 

It is evident that in all other jurisdictions engaged in selling electricity assets or developing options for sale, that disaggregation to form the units for subsequent sale is an essential step.
 
 

The Salomon Bain report commented at Section 8.5 that "Investor perceptions that the businesses are separated and operating at arms length will be important to ensure that proceeds of the equity withdrawal are maximised."
 
 

In the recommendations on action the Salomon Bain report stated that:
 
 

Consideration of the competitive and regulatory frameworks which are likely to be in place suggest that the HEC should be separated into a single combined distribution and retail company (DisCo), a single transmission company (TransCo) and a residual business containing generation and other assets.
 
 

Combining the distribution and retail businesses to create a single DisCo is recommended. Recent privatisations of combined distribution and retail companies have attracted significant investor interest. A single DisCo will still be relatively small on a global scale.
 
 

Investors will look for DisCo and TransCo to be separated and operating in an arms’ length manner from the other businesses for a period of time prior to equity withdrawal in order to minimise the separation risk. Provided this is achieved, an investor is likely to be indifferent as to the ownership structure prior to the equity withdrawal.
 
 

While the TransCo and DisCo businesses should be prepared for equity withdrawal on a stand-alone basis, a single investor should not necessarily be prevented de from buying both businesses if the combined offer is more attractive than offers for the businesses separately.
 
 

Creation of TransCo and DisCo from the HEC will maximise the value of the equity withdrawal from the retailing and network assets and meet the requirements of competition and regulation. Further separation of system control and generation will also be required to enable operation of a competitive market."
 
 

 The Salomon Bain report identified that "… as a minimum it is advisable to have completed a half year end reporting period under the new arrangements prior to buyer due diligence".
 
 
 
 

In evidence from Victoria, complete separation of each business is an essential step leading up to privatisation and is a requirement under NCC and COAG agreements.
 
 

5.6.2 The Appropriate Corporate Structure
 
 

Salomon Bain argued that:
 
 

To ensure the proceeds from equity withdrawal are maximised, investors must perceive that the businesses are separated from HEC, and operating at arms length from Generation and each other. In acquiring the transmission and distribution/retail businesses, potential investors are likely to require:
  As noted above, Salomon Bain concluded that the creation of separate Transmission and Distribution/Retail companies, TransCo and DisCo respectively, would maximise the value of the equity withdrawal from the retailing and network assets and meet the requirements of competition and regulation.
 
 

Finding 20

The Committee found that the disaggregation of electricity assets to form separate businesses was an essential prerequisite to sale.

 5.6.3 Timing Issues
 
 

The Committee recognised that the timetable set for potential sale or lease of the HEC assets requires a lead-time to prepare the businesses for sale.
 
 

Finding 21

The Committee found that the Government’s current timetable would require prompt action on disaggregation given the plan to introduce legislation to progress the sale or lease later in 1998.
 
 

5.7 Summary Comparison
 
 
Reason  The Need to 
Appropriate Corporate Structure
Timing Issues
Disaggregate Subsidiaries Separate GBEs Separate Companies
Obligations of NCP and COAG agreements Disaggregation required because of commitments given to NCC.
 
 

At a minimum Transmission must be separated from Generation and Distribution/Retail. 

 Not tested in absence of entry to NEM
 
 

Unlikely to meet full compliance test by NCC

 

 Fully consistent
 
 

 

 Fully consistent
 
 

 

 State matter.

No obligations to NCC in respect of timing.
Development of competition in the ESI Disaggregation desirable as a step towards the development of competition in the Tasmanian ESI. Satisfactory interim phase but concerns over conflict of interest and anti-competitive behaviour Consistent, however, may be easier to deliver competitive neutrality under standard legal company structure as opposed to GBEs

 

 Fully consistent

(based on NCC and IC assessments of SA)

 Early disaggregation is likely to stimulate the development of competition
Business imperatives for the HEC Disaggregation is a means to achieve increased efficiency.
 
 

The competitive pressures of the NEM require the HEC to adopt a new business focus to succeed.

 The HEC initially preferred the subsidiary option and had no firm view as to when it would ultimately move to separate companies.

 

 Would allow for full benefits of disaggregation Now HEC preferred option due to time delays since its initial proposal.
 
 

Government preferred option

 Early implementation will enhance the business evolution of the HEC
 
 

Government wishes to see new structures established ASAP
 
 

HEC committed to disaggregation by 1 July 1998
Proposed entry of Tasmania to the NEM via Basslink Disaggregation is required. 

At a minimum the transmission business must be separated from generation and distribution/retail.

 Subsidiary company for transmission not acceptable to NCC.

Acceptability of Distribution/Retail and Generation as subsidiary companies untested.

 Fully consistent Fully consistent Lead time required to allow entities to prepare for competition
 
 

No immediate pressure given four year time frame around Basslink
Reason  The Need to 
Appropriate Corporate Structure
Timing Issues
Disaggregate Subsidiaries Separate GBEs Separate Companies
Certainty on the part of Basslink investors Disaggregation is desirable as a signal of change and to improve investor confidence in commitment to project.

 

 Satisfactory alternative Acceptable Acceptable Early decision-making may improve certainty of investment
Sale/Lease of the transmission and retail/distribution businesses Disaggregation is essential. Not preferred for sale as the model increases the separation risk Increased separation risk because entities not operating in the way in which they will be.
 
 

Likely to be less acceptable than separate companies because of market perception of unconventional structure

 Maximises value in equity withdrawal
 
 

Likely to be preferred by potential investors

 Government timetable to achieve sale/lease requires prompt decision to disaggregate and form separate companies

 
 
  5.8 The Costs and Benefits of Disaggregation and Impact on the Consolidated Fund

5.8.1 The Costs and Benefits of Disaggregation
 
 

Evidence from the HEC indicated that disaggregation to form two separate companies will involve additional costs. The Committee was presented with evidence by the HEC on the estimated cost of disaggregation. Whilst the costs were not identified in detail, the order of magnitude was as follows:
 
 

 The Committee was not in a position to test these numbers in any way. The Government produced further evidence in the form of an appraisal of the HEC’s cost estimates by an accounting firm. This advice supported the estimates of cost, but did not give further detail.
 
 

The only comparison is to look at current costs of corporate overheads for the HEC as a whole. At present, the total cost for corporate services is $20.4 million. These are currently allocated to the retail, distribution and transmission businesses as follows:
 
 

 In total these three account for 54% of total corporate overhead. In this context, the additional costs do not appear inconsistent. However, the suggested additional costs have not been defined with great precision which leaves the conclusion that there would be scope for these to be lower, or some risk of the cost being greater. The quantum of cost would ultimately rest on the management of the process and constraints placed on the new structures.
 
 

Two cost comparisons arose in the debate on the Electricity Companies Bill 1997 and subsequent discussions:
 
  Given their prominence in earlier debate some comment on each is considered useful to enable an assessment of the validity of these in any comparison with the current propositions.
 
 

In looking at ETSA, the structure of which has been described earlier, ETSA suggested that costs of disaggregation would be not less than $18 million annually. These comprised:
 
 

 These claims were not examined in detail as some had no relevance, but it is noted that the IC had doubts as to their validity. In addition, from evidence presented, only the first of these categories of cost would be faced in Tasmania.
 
 

In the case of the Reeves/Breslin assessment, the quoted costs from disaggregation of around $3 million annually related to the splitting of retail from distribution and arose principally from the necessary duplication of customer billing systems and separate administration to handle 240,000 customers. In addition, the costs would only arise if Tasmania joined the NEM.
 
 

Finding 22

The Committee found that:

 In cost terms, the HEC has suggested that efficiency savings realised will generate savings to offset the additional costs. A brief review by accountants Ernst and Young produced a suggested figure for savings in the order of $2.7 million. However, this evidence was not backed by detailed cost estimates.
 
 

Significant weight was given to the benefits of business focus and efficiency in evidence presented in Victoria which would suggest that there may be substantial advantage in disaggregation. However, it must be recognised that some of the gain in Victoria has been through employment reduction and a change in risk management systems which involves a reduction in capital expenditure. The HEC is currently achieving a 4% annual reduction in operating costs, but also stated that, within its existing structure, the scope to maintain this in the longer term was questionable.
 
 
 
 

Evidence from Mr Alex Walker, Chief Executive Officer of Integral Energy (a state-owned distribution/retail GBE in NSW) identified reductions in labour costs as a source of considerable efficiencies but also noted the greater importance of capital efficiency in the case of Integral Energy:
 
 

But the other side that has improved - and in our case more dramatically - is capital efficiency. When we entered the current network regulated pricing arrangement in 1996 our previous year’s capital expenditure on our network business was about $130 million per annum. We contracted with the Regulator to reduce that to about $90 million per annum. We have currently reduced it to $50 million per annum, and we believe a viable level of investment is somewhere between $40 million and $50 million long-term, with a few bumps in it. That is a more dramatic level in those recent years. That is a more dramatic improvement than the operating cost side of things.
  Evidence from many senior executives emphasised that in improved business focus, the process of restructuring, the capacity to identify and dispose of surplus assets and other scope to identify efficiencies, there is potential to remove any need for additional costs from disaggregation.
 
 

In further evidence to the Committee Mr Challen discussed the potential benefits from disaggregation in creating productive tensions between the entities and greater questioning of the costs and values of services in areas such as information technology.
 
 

The evidence presented also identified that by disaggregating and separating the natural monopoly parts of the business from the contestable parts, there would be closer scrutiny of costs in those monopoly areas subject to price regulation.
 
 

Comment from witnesses in NSW and Victoria (including Professor Hilmer and Dr Vertigan), raised doubt as to whether, with good management, there should be any extra net cost resulting from disaggregation after taking account of potential savings.
 
 

Finding 23

Disaggregation provides for potential efficiency gains and improved business focus leading to cost reductions and new business opportunities that may offset the additional costs.
 
 

5.8.3 The Impacts of Disaggregation on the Consolidated Fund
 
 

The only impact from disaggregation would be any reduction in dividends available to Consolidated Fund in the short term. This requires assessment of the costs and benefits above. On the evidence provided the net cost of disaggregation is in the range of zero to $3 million dependent on the capacity of the new companies to generate new revenues, limit cost growth from the formation of new companies and to achieve cost reductions.
 
 

The extent to which the net costs would impact on the Consolidated Fund would also depend on the dividend policy applied.
 
 

In the longer term, if disaggregation did not occur, there is a risk to NCP tranche payments which in future years represent major revenues to the Consolidated Fund. Failure to achieve reform may prejudice the payments.
 
 

Disaggregation as the first step in sale/lease and positions the State for far greater impacts but no conclusions can be drawn at this point. This can only be addressed in subsequent reports.
 
 

Finding 24

The Committee concluded that disaggregation is unlikely to have a significant effect on the Consolidated Fund.
 
 
 
 
    1. 5.9 The Impact of Disaggregation on Contractual Obligations

      2.  

       
       
       
       

      HECEC Australia Pty Ltd, a private engineering company, presented a submission to the Committee and also gave evidence. In essence the concerns of HECEC on the issue of disaggregation relates to the impact of the creation of two new companies on the General Service Agreement (GSA) currently in place between the HEC and HECEC. This agreement gives exclusive rights to HECEC in access to HEC staff for consulting work nationally and internationally. As such the GSA is a major asset of HECEC for which a significant capital investment was made and change will threaten the value of the asset.
       
       

      HECEC has had extensive discussions with the Minister for Energy on the nature of the threats to HECEC. Potential protections were subsequently covered in the Parliamentary debate on the Electricity Companies Bill 1997.
       
       

      The Committee also received a submission and evidence from an engineering consulting firm that raised issues on the implications of the GSA for other engineering firms being able to access HEC skills for consulting work.
       
       

      The management of contracts is a widespread issue for disaggregation. Similar concerns on transfer of contract rights arose in evidence from major industrial (MI) customers. Mr D Harrison, of Comalco Ltd., stated in evidence that:
       
       

      …it is obviously crucial that in plotting a way forward through such changes, undertakings are developed to ensure that the substance and intent of all those contractual arrangements are preserved with the new operators. This is very important obviously for not only Comalco but for many others in the State.
       
       

      The Major Employers Group, stated in its submission that members had agreed on a policy position that industry would require assurances that, if the HEC is either wholly or partially sold, industry would require assurances that the new owners would honour long-term contracts.
       
       

      The Committee is not in a position to recommend action beyond commitments already made. However, as competition principles and policies are pursued, if there are any on-going anti-competitive practices these must be made transparent and be demonstrated to be in the public interest.
       
       

      Finding 25

      The Committee considers that the Government must ensure that contracts to supply electricity and other services which have anti-competitive components must be transparent and demonstrably in the public interest.
       
       

      The Committee concluded that, in disaggregation, changes to contractual arrangements will need to be managed to minimise financial risk.
       
       
       
       
       
       

    2. 5.10 The Impacts of Disaggregation on Employment

      3.  

       
       
       
       

      In evidence to the Committee the HEC identified that analysis of its strengths showed that the HEC staff represented a major asset to both the HEC and the state. Therefore, in any disaggregation, the HEC wished to preserve this value as a basis for future growth in employment. However, the HEC recognised the need for new skills in the organisation to manage new dimensions of the business. The HEC wished to see restructuring occur in such a manner as to present an opportunity to grow employment in the State.
       
       

      The HEC in its submission and evidence relating to the models for disaggregation placed considerable emphasis on the need for effective management of the change process and demonstrated a commitment to processes which maximised staff commitment and support and minimised skill loss. This in part underpinned the initial proposals to use subsidiary structures for the disaggregation process.
       
       

      The theme of ensuring that the human capital and skills contained in the HEC through a period of disaggregation and change was reinforced in evidence from Sinclair Knight Merz. This reflected a view that engineering skills were at risk of being lost in Australia and that it was essential to ensure strategies are adopted to retain these skills in the new organisations.
       
       

      In both NSW and Victoria, the evidence indicated that the process of formation of new companies to undertake differing roles did result in employment reductions. In some cases there was an overall reduction in numbers, in other cases there was an initial decline as skills not required were reduced followed by an increase in numbers due to recruitment of new skills.
       
       

      A witness from the Latrobe Valley provided evidence on the negative impacts of disaggregation as a part of the subsequent process of privatisation and major employment reduction in the Victorian ESI. Significant social impacts have arisen from the reductions in employment in the generation industry in the Latrobe Valley.
       
       

      Ms Munroe, Executive Director of the Energy Projects Division of the Victorian Treasury provided employment statistics for changes in the electricity industry in Australia. These showed that in the period from June 1988 to June 1996 employment in the ESI declined by 63.6% in Victoria and 58.3% in Tasmania. These occurred against an Australian average of 47.6%. In using statistics on employment in the ESI, the results can be very misleading as there is no recognition of employment changes due to the contracting out of work, and over the same period there has been a huge reduction in construction activities and consequent workforce reductions.
       
       

      It can be concluded from these employment changes that the major reductions in Victoria through the reform process are not significantly different to those that have occurred in Tasmania over the same period during HEC restructuring.
       
       

      The Committee also received a submission from the Australian Services Union expressing concern on the proposals to disaggregate. The submission argued for specific industrial arrangements to protect workers in the transition process, particularly relating to management of any subsequent sale of the businesses.
       
       

      Finding 26

      The Committee concluded that the management of the disaggregation process must take significant account of human resource management to minimise skill loss.
       
       

      The Committee concluded that, following the disaggregation process, efficiency improvement is likely to result in reductions in employment levels. However, it was recognised that the subsequent proposals for sale or lease could have more significant employment impacts.
       
       
       
       

    3. 5.11 Consumer Impacts from Disaggregation

      4.  

       
       
       
       

      Issues relating to consumer impacts appeared to relate more to experience in a post privatisation environment than the process of disaggregation. However, experience in Victoria did highlight some points of relevance.
       
       

      Evidence presented in Victoria by Denis Nelthorpe for the Consumer Law Centre suggested that in the period between corporatisation and privatisation of the distribution companies there was a rise in disconnections as the companies were prepared for sale. However, data presented for the period since privatisation showed a decline in disconnection.
       
       

      Whilst this cannot be directly attributed to disaggregation, if this is a phase in improving the business prior to sale, it was suggested that there be full monitoring of the business behaviour. In Victoria, the absence of effective statistics on business performance prior to disaggregation did not allow effective comparisons to be drawn.
       
       

      Other industry witnesses emphasised that, particularly since privatisation, public and media interest in electricity business performance has risen steeply. Under public ownership there was no particular focus on system outages or other problems. The media now follows such occurrences closely giving rise to public perception that system performance has declined. Statistics presented by witnesses countered this view.
       
       

      Similarly, a common public perception was that power prices had risen in Victoria, yet evidence provided supported a view that contestable prices are declining at this time. Maximum prices in the domestic sector are set by legislation to the year 2000. However, the complexity and legitimacy of comparing energy prices across states with differing tariff structures militates against ready comparison.
       
       

      Finding 27

      The process of disaggregation is not likely to create particular consumer impacts. However, in any intermediate phase between disaggregation and sale/lease where a business is being prepared for sale/lease whilst in public ownership, its performance in relation to consumer issues such as disconnections should be monitored to ensure no significant negative impacts occur.
       
       
       
       

    5. 5.12 Conclusions and Recommendations

 
 

It must be noted that this is an interim report about disaggregation and the Committee has not yet completed its deliberations about the sale/lease of the transmission and distribution/retail businesses and the proposed development of Basslink. As such, the findings, conclusions and recommendations presented must not be considered to pre-empt those that may be made in subsequent reports.
 
 

The Committee recommends that the HEC be disaggregated into three separate businesses:
 
 

The Committee concluded that disaggregation is unlikely to have a significant effect on the Consolidated Fund.
 
 

The Committee concluded that a number of factors indicate that there are significant impediments to the development of competition in both the generation and retail sectors of the Tasmanian electricity supply industry. These include:
 
 

The Committee concluded that these factors would prevail regardless of whether the businesses are operated in public or private ownership.
 
 

The Committee concluded, however, that disaggregation is the first step to the introduction of contestability and subsequent competition in the generation and retail sectors.
 
 

The Committee, in recommending disaggregation as a first step to the introduction of competition, recommends that significant effort be applied in preparing further strategies to enable the development of competition in the generation and retail sectors of the Tasmanian electricity supply industry.
 
 

The Committee concluded that the preferred corporate structure for each business is dependent on the outcome/s sought through disaggregation. The options are summarised in the following table.
 
 
 
 
 
 

OUTCOME SOUGHT: FUTURE DEVELOPMENT OF ELECTRICITY SUPPLY INDUSTRY IN TASMANIA

(in isolation from NEM interconnection and equity withdrawal)
 
 
 
 
 
outcome sought corporate structure options

for transmission and distribution/retail businesses

 is disaggregation recommended?
    1. benefits/considerations
 time considerations

 
FUTURE DEVELOPMENT OF ELECTRICITY SUPPLY INDUSTRY IN TASMANIA

(in isolation from NEM interconnection and equity withdrawal)

 Wholly Government owned private companies established under the Electricity Companies Act 1997.
 
 

 

 Yes
  • Consistent with model proposed by Government. 
  • Can be rapidly implemented given legislation already in place. 
  • Provides complete separation of business elements. 
  • Clear capacity to meet NCP obligations. 
  • Accountable to Parliament through the Memorandum and Articles of Association of the companies.
  • Legislation for disaggregation in place through Electricity Companies Act 1997. 
  • Disaggregation can continue consistent with HEC’s current timeframe of 1 July 1998 for start of new businesses.
 
Separate GBEs

 

 Yes
  • Consistent with existing GBE structures. 
  • Provides complete separation of business elements. 
  • Able to comply with all NCP requirements. 
  • Currently accountable to Parliament.
  • New legislation required.
 
Subsidiaries of existing HEC

 

 Yes
  • Enables smooth transition to disaggregated structure for HEC. 
  • Does not provide for complete separation of business elements - remaining connection between businesses through HEC Board. 
  • Potentially fulfils COAG/NCP obligations in isolation from NEM but not fully tested. 
  • Simplifies accounting transition for HEC. 
  • Allows maximum flexibility to Government to vary structure in the future. 
  • Originally HEC preferred position but later changed.
  • No new legislation required.
  • Can be implemented for 1 July 1998 start based on previous HEC view

 
 
 

OUTCOME SOUGHT: DEVELOPMENT OF BASSLINK AND NEM INTERCONNECTION
 
 
 
 
 
outcome sought corporate structure options for transmission and distribution/retail businesses is disaggregation recommended?
    1. benefits/considerations
 time considerations

 
DEVELOPMENT OF BASSLINK AND NEM INTERCONNECTION Wholly Government owned private companies established under the Electricity Companies Act 1997.

 

 Yes
  • Fully complies with COAG/NCP obligations. 
  • Well recognised corporate structure. 
  • Consistent with models in other States involved in NEM. 
  • Distribution/Retail structure not fully resolved with NCC.
 
  • Legislation for disaggregation in place through Electricity Companies Act 1997. 
  • Entry currently proposed for 2001-2002 with lead-time for investor commitment and development. 
  • Disaggregation timing is not critical but consistent with HEC’s current timeframe of 1 July 1998.
 
Separate GBEs

 

 Yes
  • Potentially complies with COAG/NCP obligations but not fully tested. 
  • Well established model in Tasmania. 
  • Comparable to models in other states involved in NEM. 
  • Distribution/Retail structure not fully resolved with NCC.
 
  • New legislation required. 
  • Entry currently proposed for 2001-2002 with lead-time for investor commitment and development. 
  • Disaggregation timing is not critical but consistent with HEC’s current timeframe of 1 July 1998.
 
Subsidiaries of existing HEC Yes
  • Does not comply with COAG and NCP obligations for NEM. 
  • Could be considered for interim step. Cannot be recommended in longer term.
 
  • No new legislation required.
  • Acceptable prior to entry to the NEM.

 
 
 

OUTCOME SOUGHT: EQUITY WITHDRAWAL VIA LEASE OR SALE
 
 
 
 
 
outcome sought corporate structure options for transmission and distribution/retail businesses is disaggregation recommended?
    1. benefits/considerations
 time considerations

 
EQUITY WITHDRAWAL VIA LEASE OR SALE Wholly Government owned private companies established under the Electricity Companies Act 1997.
 
 
 
 

 

 Yes
  • Maximises value for sale. 
  • Preferred structure in consultant’s work. 
  • Model is well understood in marketplace. 
  • Ensures separation risk is minimised. 
  • Not tested for lease.
 
  • Legislation for disaggregation in place through Electricity Companies Act 1997. 
  • Requires a minimum six months’ trading results for "due diligence" processes. 
  • Disaggregation can occur consistent with Government’s timeframe to achieve new structures from 1 July 1998. 
  • Consistent with the HEC timetable for change.
 
Separate GBEs Yes
  • Unlikely to affect sale price. 
  • Potentially less acceptable than private company due to more limited familiarity in marketplace. 
  • Not tested for lease.
 
  • New legislation required. 
  • Requires minimum six months’ trading results for "due diligence" processes.
 
Subsidiaries of existing HEC Yes
  • Not preferred for sale as the model increases the separation risk. 
  • Could only be considered as interim position to simplify initial separation. 
  • Not tested for lease.
 
  • No new legislation required. 
  • Would require additional time to move to full separation and have minimum of six months’ trading results.

 

Glossary
 
 
ACCC Australian Competition and Consumer Commission
COAG Council of Australian Governments
ESI Electricity Supply Industry
ETSA Electricity Trust of South Australia
GBE Government Business Enterprise
GBF Gordon-Below-Franklin
GPOC Government Prices Oversight Commission
GSA General Services Agreement
HEC Hydro-Electric Corporation
MI Major Industrial
NCC National Competition Council
NCP National Competition Policy
NEC National Electricity Code of Conduct
NECA National Electricity Code Administrator
NEM National Electricity Market
NEMMCO National Electricity Market Management Company
NGMC National Grid Management Council
OEPC Office of Energy Planning and Conservation
PAC Public Accounts Committee
SECV State Electricity Commission of Victoria
SPC Special Premiers’ Conference

 
 
 
 
 
 
 
 
 

PUBLIC ACCOUNTS COMMITTEE INQUIRY INTO

DISAGGREGATION OF THE HYDRO-ELECTRIC CORPORATION


 







APPENDIX 1 - DOCUMENTS RECEIVED AND TAKEN INTO EVIDENCE
 
 
 
 
 

No. Description Date

Tabled
 
 

1. Bain International and Salomon Brothers. Hydro-Electric

Corporation ‘Restructuring for Growth’: Executive

Overview. 22/12/97
 
 

2. New South Wales. Committee of Inquiry into the Sale

of the NSW Electricity Assets. Report . 22/12/97
 
 

3. Smith, Stewart. Electricity and Privatisation

New South Wales Parliamentary Library Research

Service . 22/12/97
 
 

4. Letter from Dr. Norton to Mr. Challen.

‘HEC Financial Projections’, dated 28 July 1997. (Copy) 2/2/98
 
 

5. Reeves, Andrew, Commissioner, H.E.C.

National Competition Policy. Review of the Structure

of the Hydro-Electric Corporation’s Distribution

and Retail Businesses - Issues and Options October, 1997. 2/2/98
 
 

6. ‘Memorandum Of Understanding’ in relation to the

provision of financial assistance to Tasmania in respect

of the cessation of work on the Gordon River Power

Development (stage 11). 2/2/98
 
 

7. Tasmania. Government. Premier. Media Release

dated 6 February, 1998 - "Appointment of Financial

Adviser for Restructuring and Partial Sale of Hydro-

Electric Corporation". 11/2/98
 
 

8. Electricity Week’s Energy Risk - November 7, 1997,

Vol.2, No. 9. 11/2/98
 
 

9. Hydro Electric Corporation - Annual Report, 1997. 11/2/98
 
 

10. Tasmania. Department of Treasury and Finance. The impact

on the Consolidated Fund of the Partial Sale of the HEC.

February, 1998. 12/2/98
 
 

11. Tasmania. Department of Treasury and Finance. Tasmania’s

Debt Burden. February, 1998. 12/2/98
 
 

12. Tasmania. Department of Treasury and Finance. The

Structural Separation of the Hydro-Electric Corporation.

February, 1998. 12/2/98
 
 

13. Tasmania. Department of Treasury and Finance. The

Tasmanian Budget: Competing Demands and Budgetary

Constraints. February, 1998. 12/2/98
 
 

14. Tasmania. Department of Treasury and Finance. The

Regulatory Framework for Tasmania’s Electricity Supply

Industry. February, 1998. 12/2/98
 
 

15. NEMMCO. Australia’s National Electricity Market -

An Introduction. 12/2/98
 
 

16. Tasmania. Terms of Reference: Financial Adviser on the

Sale of Electricity Businesses. 12/2/98
 
 

17. Tasmania. Department of Treasury and Finance. The

Structural Separation of the Hydro-Electric Corporation.

National Competition Policy Implications, 1998. 12/2/98
 
 

18. Tasmania. National Competition Policy Progress Report, 1997. 12/2/98
 
 

19. Tasmania. Office of Energy Planning and Conservation.

Electricity in Tasmania. A position paper on the current

market situation and future prospects. April, 1997. 12/2/98
 
 

20. Moody’s Investor. Regional and Local Government -

Australian States Analysis, 1997 p. 128, pp 15 - 17. 12/2/98
 
 

21. ‘Standard and Poors’. Tasmanian Government Reports,

1997 - pp 118-119; pp2-18. 12/2/98
 
 

22. Confidential (Kept in Separate File)

Bain International and Salomon Brothers. ‘Hydro-

Electric Corporation. Restructuring for Growth’ October,1997. 12/2/98
 
 

23. Confidential (Kept in Separate File)

Tasmania. Basslink Development Steering Committee.

Report December 1997. 12/2/98
 
 

24. Confidential (Kept in Separate File)

Tasmania. Department of Treasury and Finance.

Competition Project Team. Electricity Competition in Tasmania. 12/2/98
 
 

25. Confidential (Kept in Separate File)

‘Options for the Structural Separation of the HEC’ Report:

August, 1997. 13/2/98
 
 

26. Victorian Treasury & Finance Department.

A folder entitled ‘Information provided to the Public 23/2/98

Accounts Committee, Parliament of Tasmania, Inquiry into

Disaggregation of the Hydro-Electric Corporation and

Related matters’ containing the following documents was

tabled by Dr Michael Vertigan, Secretary, Department

of Treasury and Finance, Victoria and Ms Chloe Munroe,

Executive Director, Energy Projects Division, Department

of Treasury and Finance, Victoria.
 
 

1. Economic and Social Relevance.
 
 

(a) The Electricity Supply Industry in Victoria, A

Competitive Future - Electricity, Summary, October, 1993.
 
 

b) Reforming Victoria’s Electricity Industry Stage 2 - A

Competitive Future - Electricity, February, 1994.
 
 

c) Victoria’s Electricity Supply Industry - Towards 2000,

June, 1997.
 
 

d) The Privatisation of the SECV, Your 20 Questions

Answered.
 
 

(e) Reforming the Electricity Supply Industry - A brighter

Future for All Victorians pp 2-4.
 
 

2. Consumers Issues.

(a) Victoria’s Electricity Supply Industry - Towards 2000,

June, 1997.
 
 

(b) Community Service Obligations, Policy Statement

and Background to Policy, August, 1994.
 
 

(c) Reforming the Electricity Supply Industry - A

Brighter Future for All Victorians pp 12-17.
 
 

(d) Electricity Brochures.

i) Competitive Structure and Customer Choice. Guaranteed.

ii) Special Benefits for Concession Card Holders.

Guaranteed.

iii) Reduced Bills and Improved Services.

Guaranteed.

iv) Utility Reform ........ The Benefits.
 
 

3. Measurement of Privatisation Vs Public Ownership.
 
 

(a) 1997-98 Budget Statement, Budget paper

No. 2 p.131.
 
 

(b) Report of the Auditor-General on the

Government’s Annual Financial Statement

1997/98, p.42.

(Website - http://home.vicnet.net.au/`vicaud1/aghome.htm)
 
 

(c) Auditor-General’s Office - Report on Ministerial

Portfolios, May 1996, p.275.

(Website - http://home.vicnet.net.au/`vicaud1/aghome.htm)
 
 

4. Employment.
 
 

(a) ESAA Employment Data - Summary.
 
 

(b) The Privatisation of the SECV, Your 20 Questions

Answered, Q.19.
 
 

5. Budgetary Considerations.
 
 

(a) 1997-98 Budget Statement, budget paper

No. 2, pp 129-131.
 
 

(b) Report on Ministerial Portfolios, May 1996 p.275.

(Website - http://home.vicnet.net.au/`vicaud1/aghome.htm)
 
 

(c) Victoria - The Story So far - 4th Annual Report,

pp.12-13.
 
 

6. Environmental Impacts.
 
 

(a) Victoria’s Electricity Supply Industry - Towards

2000, June 1997, Chapter 10.
 
 

(b) Reforming the Electricity Supply Industry - A

Brighter Future For All Victorians pp.18-22.
 
 

7. Disaggregation Issues.
 
 

(a) Special Report No. 38, Privatisation - An audit

framework for the future, Victorian Auditor-General’s

Office, November 1995, pp.35-36.

(Website - http://home.vicnet.net.au/`vicaud1/aghome.htm)
 
 

(b) Victoria’s Electricity Supply Industry - Towards

2000, June 1997, p.14.
 
 

27. Walker, Dieneke, Consumer Benchmarks for Energy and

Water: A Consumer Perspective of Regulation and

Service Delivery, Melbourne Consumer Law Centre Victoria

Ltd.1996. 23/2/98
 
 

28.(a) Victorian Power Exchange Annual Report, 1997. 23/2/98
 
 

(b) Victorian Power Exchange - Vicpool and the National 23/2/98

Electricity Market, August, 1997.
 
 

29.(a) Electricity Industry Ombudsman (Victoria )Limited,

Annual Report, 1996-97 and summary.
 
 

(b) Electricity Industry Ombudsman Victoria Limited. Mission

Statement and guiding principles.
 
 

(c) Copies of Electricity Industry Ombudsman Newsletter -

Resolution Nos 1-4. 24/2/98
 
 

30. Solaris Power - Appendix to presentation. Parliament of

Tasmania. Standing Committee of Public Accounts. Inquiry

into Disaggregation of the Hydro-Electric Corporation and

Related matters. 24/2/98
 
 

31. Hydro-Electric Corporation. Report on Structural Separation -

project and progress. (List attached to Correspondence from

H.E.C., 6th March, 1998, (No. 1) 9/3/98
 
 

32. Hydro-Electric Corporation. Advice to Government on

Debt Allocation to Separated Businesses. (No. 2) 9/3/98
 
 

33 Hydro-Electric Corporation. Detailed Analysis of

Recurrent Costs of Disaggregation. (No. 3) 9/3/98
 
 

34. Hydro-Electric Corporation. Cost Implications of

Separating Generation from Transmission. (No. 4) 9/3/98
 
 

35. Hydro-Electric Corporation. Cost Savings from

Disaggregation, Efficiency Gains, etc. (No. 5) 9/3/98
 
 

36. Hydro-Electric Corporation. Benchmarking Against

Other Utilities. (No. 6) 9/3/98
 
 

36. (b) Hydro Generation Benchmarking.

36. (c) Australian/New Zealand Transmission

Authorities Comparisons - 1996/97.

36. (d) Electricity Supply Association of Australia

Ltd. Electricity Australia 1997.

36. (e) Hydro-Electric Corporation. Comparative

Interstate Electricity Pricing Study;

Commercial and Light Industrial Customers, 1995.

36. (f) Coopers and Lybrand Consultants. Hydro-

Electric Corporation 1994 - Compariative

Assessment of Electricity Distributors in Australia.

36. (g) UMS Group Best Performer.
 
 

37. Hydro-Electric Corporation. Total Residual Hydro Potential

(Regardless of Land Use). (No. 7) 9/3/98
 
 

38. Hydro-Electric Corporation. Advice to Government on Gas

Potential. (No. 8) 9/3/98
 
 

39. Hydro-Electric Corporation. Load Factor for King Island Wind.

(No. 9) 9/3/98
 
 

40. Hydro-Electric Corporation. Cloud seeding - not yet available
 
 

41. Hydro-Electric Corporation. Latest Solar Energy

Developments. (No. 11) 9/3/98
 
 
 
 

42. The Electricity Supply Association of Australia. The 4th

Renewable Energy Technologies and Remote Area

Power Supplies Conference, 23-25 February, 1998,

Hobart, Tasmania. (No. 12) 9/3/98
 
 

43. Hydro-Electric Corporation. Break up of Costs

Between Generation, Transmission and Distribution

and Allocation to Various Classes of Customer. (No. 13) 9/3/98
 
 

44. Hydro-Electric Corporation. Demand Forecasts. (No. 14) 9/3/98
 
 

45. Hydro-Electric Corporation. Onselling of Power -

Restrictions on. (No. 15) 9/3/98
 
 

46. Hydro-Electric Corporation. Annexure accompanying

letter dated 13 February, 1998 9/3/98
 
 

47. Tasmanian Chamber of Commerce and Industry.

Electricity Prices. Interstate Comparisons. (Source ESAA 1998) 10/3/98
 
 

48. Government Prices Oversight Commission. Derivation of

Regulated Charges for Use of the Transmission Network. 10/3/98
 
 

49. Hydro-Electric Corporation: Transmission Capital

Expenditure. 12/3/98
 
 

50. Reeves, A. Government Prices Oversight Commission:

Demonstration of Impact of new Capital Expenditure on

Annual Charges for HEC transmission and Distribution. 13/3/98
 
 

51. Tasmania. Department of Treasury and Finance

Commonwealth Tax Compensation and Privatisation.

March, 1998. 13/3/98
 
 

52. Tasmania. Department of Treasury and Finance. Letter from

Ernst and Young dated 11 March, 1998, Preliminary

Assessment of HEC Disaggregation Recurrent Costs and

Benefits. 13/3/98
 
 

53. Australian Services Union, MEU Branch. Submission to

the Committee of Inquiry into Electricity Privatisation in

New South Wales 1997. 18/3/98
 
 

54. Australian Labor Party Taskforce. Submission to the

Committee of Inquiry into the Sale of Electricity Assets, 1997. 18/3/98
 
 

55. Labor Council of New South Wales. Submission to the

Committee of Inquiry into Electricity Privatisation in

New South Wales, 1997. 18/3/98
 
 

56. Sinclair Knight Merz Pty. Ltd. - Presentation to Tasmanian

Parliament’s Joint Standing Committee on Public

Accounts (Note Page 7 tabled seperately and in confidence.) 19/3/98
 
 
 
 

57. Letter HEC dated 11 March with Attachment:- List of

Documents and Reports held by HEC considered relevant

to Public Accounts Committee Inquiry into HEC Disaggregation. 26/3/98
 
 

58. Letter dated 24 March with Attachment:- Notes for Standing

Committee of Public Accounts - ‘Impact of Disaggregation

on Major Industrial Contracts’. 26/3/98
 
 

59. Letter CEPU dated 11 March re: HEC Disaggregation. 26/3/98
 
 

60. National Competition Council. Compendium of National

Competition Policy Agreements. 26/3/98
 
 

61. Government Prices Oversight Commission. Hydro-Electric

Commission Retail Prices Investigation. Final Report 1996. 26/3/98
 
 

62. Hilmer, Fred - Structural options for the Hydro -

a competition policy perspective - Tasmania Paper from

2010 Forum: The Hydro - Who should own it? Forum IX

Hobart 1996. 26/3/98
 
 

63. Tasmania. Department of Treasury and Finance.

Regulation of transmission and Distribution Network Pricing. 26/3/98
 
 

64. National Competition Council. Assessment of progress:

NCP and related reforms. First Tranche Assessments:

Tasmania pp104-115. 26/3/98
 
 

65. Industry Commission. The Electricity Industry in South

Australia, 1996. 26/3/98
 
 

66. Letter:- Department of Treasury and Finance Dated 26

March citing the report Corporatisation and Private Equity

Options for the HEC by Cresap Langton. 30/3/98
 
 

67. National Competition Council: Press Release dated 20

March 1998 re: the Public Accounts Committee hearing

in Sydney on the 19 March 1998. 30/3/98
 
 

68. Folder comprising transcripts of evidence taken in

Melbourne on 23, 24 February, 1998; and in Sydney

18, 19 March, 1998. 6/4/98
 
 

69. HEC. Letter dated 10 October, 1997, to Minister for

Energy ‘Competition arrangements’. 6/4/98
 
 

70. HEC. Letter dated 10 October, 1997, to Minister for Energy

‘Establishment of New Structural Arrangements for the

Hydro-Electric Corporation’. 6/4/98
 
 

71. HEC. Letter dated 13 October, 1997, to Minister for

Energy ‘Proposed Legislation to Establish New Structural

Arrangements for the Hydro-Electric Corporation’. 6/4/98
 
 
 
 

72. HEC. Letter dated 15 October, 1997, to Minister for

Energy ‘Proposed Legislation to Establish New Structural

Arrangements for the Hydro-Electric Corporation’. 6/4/98
 
 

73. HEC. Letter dated 26 November, 1997, to Minister for Energy

re ‘Ministerial Statement Implementation of New Energy

Directions’ 19 November 1997. 6/4/98
 
 

74. Weston, Steve: Review of Energy Production Capability of the

Hydro-Electric System. 6 November, 1995. 6/4/98
 
 

75. National Grid Management Council: ‘Empowering the Market’

1994. 6/4/98
 
 

76. Bannister, Hugh: ‘A review of recent Basslink Studies’:

A report prepared for the Office of Energy Planning and

Conservation and the Hydro-Electric Corporation. 6 February,

1996. 6/4/98
 
 

77. Bannister, Hugh: ‘Developing a Business Case for

Basslink’: A report prepared for the Office of Energy

Planning and Conservation and the Hydro-Electric

Corporation. 14 February, 1996. 6/4/98
 
 

78. The Hydro Vision : Briefing material March, 1997. 6/4/98
 
 

79. Hydro-Electric Corporation Annual report 1997 and

Promotional Material in folder for Public meeting 1997. 6/4/98
 
 

80. Hydro-Electric Corporation Press releases dated 10 April,

18 April, 20 April, 21 April, 1997. 6/4/98
 
 

81. Cresap Langton: Corporatisation and Private Equity

Options Executive Summary. 9 August, 1993. 6/4/98
 
 

82 Cresap Langton: Corporatisation and Private Equity

Options Report. Sections 11 to V11. 9 August, 1993. 6/4/98
 
 

83. Cresap Langton: Corporatisation and Private Equity Options

Appendices to Report. 9 August, 1993. 6/4/98
 
 

84. Letter from Premier to National Competition Council dated

10 November, 1997, seeking responses to the

Government’s energy initiatives as detailed. 6/4/98
 
 

85. Letter from National Competition Council dated 9 December,

1997, replying to letter from Premier. 6/4/98
 
 

86. Evidence submitted to the Committee by Mr. Colvin Smith,

47 Valley Road, Devonport, dated 30 March, 1998 6/4/98
 
 

87. Letter from National Competition Council dated 9 April,

1998, to Secretary, Department of Treasury and Finance. 15/4/98
 
 



PUBLIC ACCOUNTS COMMITTEE INQUIRY INTO

DISAGGREGATION OF THE HYDRO-ELECTRIC CORPORATION


 







APPENDIX 2 - SUBMISSIONS RECEIVED AND TAKEN INTO EVIDENCE
 
 
 
 
 

No. Description Date Date

Received Tabled
 
 

1. Government Prices Oversight Commission,

GPO Box 770 HOBART 7001, Mr. Andrew

Reeves, Commissioner. 29/1/98 2/2/98
 
 

2. HECEC Aust. Pty.Ltd., GPO Box 1484R, HOBART 2/2/98 9/3/98

7001, Mr. Arthur Watts,Managing Director
 
 
 
 

3. Tasmanian Independent Wholesalers, Locked Bag 4, 2/2/98 9/3/98

LAUNCESTON 7250, Mr. Sam Richardson
 
 

4. Hydro-Electric Corporation, GPO Box 355D, HOBART

7001, Dr. Daniel T. Norton, Chief Executive Officer 5/2/98 9/3/98
 
 

5. Tasmanian Chamber of Commerce & Industry, 30

Burnett Street, North Hobart. 7000, Mr. Tim Abey,

Secretary 9/2/98 11/2/98
 
 

6. The Major Employers Group (Tas.), GPO Box 937,

Hobart 7001 Mr. Terry Long, Convenor 9/2/98 11/2/98
 
 

7. Department of Treasury and Finance, Franklin Square,

Hobart 7000, Mr D. Challen, Secretary 12/2/98
 
 

8. Australian Services Union, Tasmanian Branch,

265 Macquarie Street, Hobart 7000,

Mr T.J. Cordwell, Branch Secretary 13/2/98 9/3/98
 
 

9. Submission: Letter, anonymous Hydro-Electric

Corporation employee. (Addressed to Dr. Crean) 2/2/98 2/2/98
 
 

10. Mr. John Hale, "Culbone", The Lea, Kingston 7050 9/3/98
 
 





PUBLIC ACCOUNTS COMMITTEE INQUIRY INTO

DISAGGREGATION OF THE HYDRO-ELECTRIC CORPORATION


 







APPENDIX 3 – LIST OF WITNESSES
 
 
 
 

Transcripts of all evidence provided by witnesses except, where it has been taken in camera, are available on the Internet at http://www/parliament.tas.gov.au/pac.htm. It should be noted that in quoting from transcript the report uses page references that may vary from those within the Internet version.
 
 

Date

23.1.98 Kerslake, Mark Department of Treasury and Finance
 
 

Rutherford, Bob Office of Energy Planning and Conservation
 
 

McShane, Nick Department of Treasury and Finance
 
 

11.2.98 Rae, Hon. Peter Hydro-Electric Corporation
 
 

Norton, Dr. Daniel Hydro-Electric Corporation
 
 

Kelleher, Mark Hydro-Electric Corporation
 
 

12.2.98 Challen, Donald Department of Treasury and Finance
 
 

Harrison, David Comalco
 
 

Watts, Arthur HECEC
 
 

Dreverman, David HECEC
 
 

13.2.98 Challen, Donald Department of Treasury and Finance

(‘In Camera’)
 
 

Sulikowski, Richard Electricity Planning Unit

(‘In Camera’)
 
 

23.2.98 Vertigan, Dr. Michael Department of Treasury and

Finance, Victoria
 
 

Munroe, Ms Chloe Department of Treasury and Finance, Victoria
 
 

Tamblyn, John Regulator-General, Victoria
 
 

Nelthorpe, Dennis Consumer Law Sector
 
 

van der Mye, Dr. Stephen NEMMCO
 
 

Macaulay, Charlie NEMMCO
 
 

Gallagher, James Victoria Power Exchange
 
 

24.2.98 Jenkins, Brendan Deputy Mayor, Latrobe Council, Victoria
 
 

Blanch, Stephen Eastern Energy, Victoria
 
 

Spaulding, Dan Powercorp, Victoria
 
 

McLeod. Ms Fiona Electricity Ombudsman, Victoria
 
 

Marshall, John Solaris Power, Victoria
 
 

10.03.98 Abey, Tim Tasmanian Chamber of Commerce and

Industry
 
 

Behrens, Nick Tasmanian Chamber of Commerce and

Industry
 
 

Long, Terry Major Employers Group
 
 

Wilson, Andrew Major Employers Group
 
 

Reeves, Andrew Government Prices Oversight

Commission
 
 

11.03.98 Rutherford, Bob Office of Energy, Planning and

Conservation
 
 

12.03.98 Rae, Hon. Peter Hydro-Electric Corporation
 
 

Norton, Dr. Daniel Hydro-Electric Corporation
 
 

Kelleher, Mark Hydro-Electric Corporation
 
 

Warnock, Tony Hydro-Electric Corporation
 
 

Bevan, Richard Hydro-Electric Corporation
 
 
 
 

13.03.98 Challen, Donald Department of Treasury and Finance
 
 

Richardson, Sam Tasmanian Independent Wholesalers
 
 

Court, Clive Tasmanian Independent Wholesalers
 
 

18.03.98 Hilmer, Prof. F. Pacific Power, New South Wales
 
 

Richardson, Mark Bain International

(‘In Camera’)
 
 

Croft, David Transgrid, New South Wales
 
 

Botsman, Dr. Peter University of Western Sydney
 
 

McLean, Greg Australian Services Union
 
 

19.03.98 Knight, Jack Sinclair Knight Merz

(Part ‘In Camera’)
 
 

Lawson, Bill Sinclair Knight Merz

(Part ‘In Camera’)
 
 

Willett, Ed National Competition Council
 
 

Samuel, Graeme National Competition Council
 
 

Kelly, Stephen NECA
 
 

Walker, Alex Integral Energy, New South Wales
 
 

06.04.98 Challen, Donald Department of Treasury and Finance
 
 

Sulikowski, Richard Electricity Planning Unit
 
 

08.04.98 Norton, Dr. Daniel Hydro-Electric Corporation
 
 

Challen, Donald Department of Treasury and Finance