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12 March 1991 - Current

 
ESSENTIAL SERVICES COMMISSION BILL
Page 218
23 August 2001
ASSEMBLY Second Reading BRUMBY
                       ESSENTIAL SERVICES COMMISSION BILL
                                 Second reading

  Mr BRUMBY (Treasurer) -- I move:
That this bill be now read a second time.
The purpose of this bill is to enable the establishment of an Essential Services
Commission from 1 January 2002 as an economic regulator of Victorian utilities.
This bill fulfils a key government election commitment to establish an Essential
Services  Commission to  ensure  high quality,  reliable  and safe provision  of
electricity, gas and water services for all Victorians.

The establishment of the Essential  Services Commission is  a critical component
of  a suite of reforms made by this government to the essential services sector,
including  the establishment of  an  Energy and Water  Ombudsman  Victoria and a
range of  reforms  arising out of  the Security of Electricity  Supply Taskforce
report. The aim of these reforms is to protect the interests of all consumers in
relation to reliable supplies of gas, water  and electricity. In protecting  the
interests of all  present and future  consumers, the government recognises  that
the  new  regulatory  arrangements  must  ensure optimal investment in essential
services infrastructure.  A well-planned, competitive,  efficiently managed  and
regulated essential services sector delivers benefits to all Victorians.
The  Essential Services  Commission  (ESC)  will promote  a  certain and  stable
regulatory  framework  conducive  to longer term investment  and  the  financial
viability of utility industries.

This  important  initiative will  also  ensure that regulation  of  utilities in
Victoria is consistent with the government's four key pillars, in that it:
        fosters more accountable, transparent and inclusive decision making;
        provides for affordable and reliable services  that are available to all
        Victorians, including low-income and vulnerable groups;
        provides for the whole of the state -- that is urban, rural and regional
        users  --  to  benefit  from  reforms in  the  regulation  of  essential
        services;
        ensures  that   the  ESC  operates  in  a  financially  disciplined  and
        responsible manner; and

        protects  the  interests  of  utility consumers  by  enhancing  customer
        advocacy arrangements.
The proposal  represents an important  evolution in the regulatory framework for
utility industries  in Victoria. It builds on the strengths of the Office of the
Regulator-General's  existing  regulatory framework,  but  proposes  substantive
improvements  in  order  to ensure  that  Victoria benefits  from  an  essential
services  regulatory system  that  is truly world  class.  Key features  of  the
Essential Services Commission to ensure it delivers on this goal include:


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a focus on achieving triple bottom-line outcomes through more effective integration of economic regulation with broader environmental and social objectives; a regulatory approach that provides strong incentives for optimal long-term investment in infrastructure; a requirement for memoranda of understanding to be developed and published by regulators; more effective regulatory oversight over reliability of supply of essential services as they affect Victoria; and enhanced accountability and transparency of regulatory decision making. This bill will be complemented with new and improved arrangements for customer advocacy, involving the establishment of an independent customer advocacy body -- the Consumer Utilities Advocacy Centre -- to deliver effective consumer input to regulatory processes. The centre will ensure a world-class centre of excellence in customer advocacy research and information dissemination and work with consumer and user groups to enhance consumer advocacy on behalf of all consumers. This is a response to consumer groups' concerns that they do not have the resources to promote informed and effective representation. The government believes that well-informed and effective consumer advocates are important in ensuring consumers, particularly those who are disadvantaged, get the best deal from their utilities -- particularly in the newly competitive retail environment. The centre will provide an interface between consumers and the commission and other regulators and will be encouraged to enter into a memorandum of understanding with the ESC. In this way the centre will ensure the voice of consumers and their advocates is heard loudly and clearly. It will also provide a forum where consumers and disadvantaged groups can come together to discuss and exchange grassroots information. The Consumer Utilities Advocacy Centre will commence operating on 1 January 2002, coinciding with the establishment of the Essential Services Commission. To this end, the Minister for Consumer Affairs has commenced further stakeholder consultation on this important initiative. The government has consulted widely on this important feature of the new regulatory arrangements and is grateful for the support shown by all stakeholders for this initiative. I now turn to the development of this legislation. The Essential Services Commission Bill has been developed in close consultation with key stakeholders, commencing with the release of a public consultation paper on 28 July 2000. This reflected the government's desire to consult widely and to carefully analyse proposals for change to the regulatory system for essential utility services, given the complex issues involved and far-reaching implications for customers, businesses and the general community. The paper drew 72 submissions from a broad cross-section of the community, including consumer and community groups, regulated businesses and industry associations, unions, regulatory and other government bodies, and individuals. These submissions demonstrated a high level of interest in, and understanding of, the range of complex regulatory issues concerning essential utility services. They also expressed strong support for the establishment of the commission with a range of features that are encapsulated in this bill. Based on these consultations, the government developed detailed plans to implement the ESC and its related initiatives. These plans were outlined in a proposal paper, 'Implementation of the Essential Services Commission', and an exposure draft of this bill, which were released for community comment on 7 June 2001. The proposal paper and the exposure draft drew some 54 submissions from a broad cross-section of the community. The submissions provided a strong endorsement of the government proposals to establish the ESC and of its approach to maximise the involvement of the community in developing the new regulatory arrangements. These submissions expressed support for the establishment of the commission with a range of features that are encapsulated in this bill. The government has also made some refinements to the draft legislation in light of responses received. A further issue raised in the proposal paper concerned the commission's role in the regulation of export grain handling facilities built after 1995. The government considers that it is appropriate for this issue to be assessed by the ESC as part of a fundamental review of the regulation of grain handling facilities, to commence in 2002. A key element of this proposal involves the Essential Services Commission becoming responsible for economic regulation of the water sector. The Office of
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the Regulator-General currently monitors Melbourne's three water retailers' compliance with their licence conditions. However, regulation of tariffs for these authorities, together with economic regulation of Melbourne Water and Victoria's non-metropolitan and rural water authorities, is the responsibility of the Minister for Environment and Conservation. On its establishment on 1 January 2002, the commission will initially take over the ORG's limited water regulation functions, before assuming full responsibility for economic regulation of the water sector from 1 January 2003. Before this can occur there needs to be a significant overhaul of the current regulatory arrangements for the water sector, which will need to be underpinned by new legislation. This shift of water regulation responsibility to the commission will deliver significant benefits to Victoria. It will result in a more consistent, transparent and efficient approach to the economic regulation of essential service utilities. The move to independent regulatory oversight for water utilities also ensures that Victoria meets a key water reform commitment agreed by the Council of Australian Governments. The commission will be co-funded by government and industry on an equitable and transparent basis, with ESC establishment costs to be funded by the government. The ESC will incur one-off costs of $5.2 million in 2001-02 for communication activities required for assisting consumers during the transition to full retail competition in electricity and gas markets. These costs are to be recovered from the licensed electricity and gas businesses. Notwithstanding the role of the ESC in regulating water and sewerage from 1 January 2003, the government expects that the cost of ESC regulatory services will decline from 2002-03. This is because of a reduction in the overall cost of regulation and also because of the one-off nature of cost recovery for the implementation of full retail competition for electricity and gas. Therefore the government expects that from 2002-03 the budget for the ESC will decline. As a consequence there will be a reduction in the amount of money recouped from regulated businesses. Before addressing the specific aspects of the bill, let me first summarise the key features of the commission. Broad features of the Essential Services Commission are as follows: the commission will be independent from government and subsume the Office of the Regulator-General (ORG); it will become Victoria's economic regulator of electricity and gas distribution, certain ports and grain handling services, rail access and, from 1 January 2003, water and sewerage services; it will also have an enhanced role in reliability of supply, including a capacity to conduct investigations into reliability of supply issues; it will have an objective to protect the interests of Victorian consumers; it will comprise a commission structure consisting of a chairperson and additional commissioners as required; it will be required to be transparent in its decision making and undertake extensive stakeholder consultation; it will also be required to formally interface with other regulators in order to achieve integrated decision making and avoid regulatory duplication; it will be more accountable for its decisions, with greater scope for stakeholder involvement in appeals processes and longer time lines for hearing appeals; and it will be empowered to seek to impose strong penalties on utilities that do not comply with determinations or meet licence requirements. I will now provide an outline of the bill. Part 1 of the bill contains preliminary information, including the purpose of the act, which is to establish the commission and to provide for an economic regulatory framework for regulated industries. 'Essential services' are defined to include services provided by the electricity, gas and water industries, the ports and grain handling industries, and the rail industry. Regulated industries are also defined and encompass those currently being regulated by the Office of the Regulator-General. Public transport will not be included within the jurisdiction of the commission. These services are subject to contractual oversight by the Department of Infrastructure and it would not be commercially or legally appropriate -- at this stage -- to change these arrangements. This part also describes how the Governor in Council may, by order, declare an industry to be regulated after having regard to the existence of significant and non-transitory market power, net benefits from
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regulation and the absence of similar regulatory functions being undertaken by another body. Part 2 of the bill establishes the commission and details its objectives, functions, powers, relationship with government, corporate governance and staffing arrangements. An essential prerequisite for effective economic regulation is that regulatory decisions are not influenced by the government of the day. Accordingly, the Essential Services Commission will be established as an independent economic regulator. The ESC's determinations, reports and inquiries will not be subject to ministerial direction or control. The minister will have the power to direct the ESC to conduct independent reviews of regulatory issues. The commission's primary objective will be to protect the long-term interests of Victorian consumers with regard to the price, quality and reliability of essential services. In emphasising long-term interests, the government recognises that the interests of all present and future consumers are best served through regulatory arrangements that promote an optimal environment for investment in essential utility services infrastructure. The government has also incorporated a number of facilitating objectives into the bill, which the commission will be required to have regard to in seeking to achieve its primary objective. Taken together, the primary and facilitating objectives will encourage a well-planned, competitive, efficiently managed and regulated essential services sector that delivers benefits to all Victorians. They will also ensure that, while the commission's regulatory decisions are investment focused, they fully reflect applicable environmental, safety, and social statutory requirements. These facilitating objectives are: to facilitate efficiency in the regulated industries and the incentive for efficient long-term investment; to facilitate the financial viability of regulated industries; to ensure that the misuse of monopoly or non-transitory market power is prevented; to facilitate effective competition and promote competitive market conduct; to ensure that regulatory decision making has regard to the environmental, health, safety and social legislation applying to the regulated industry; to ensure that users and consumers (including low-income or vulnerable customers) benefit from the gains from competition and efficiency; and to promote consistency in regulation between states and on a national basis. The Essential Services Commission is to be established as an economic regulator, meaning that the commission's prime focus will be on economic regulation, rather than environmental, safety or social regulation. The current regulatory framework for utility industries in Victoria involves at least 15 separate agencies at both the state and national level. Operating under a variety of legislation, codes and rules, each of these agencies is dedicated to regulating particular aspects of the activities undertaken by utility and other related industries, including economic regulation, reliability of supply, health and safety regulation, and environmental regulation. While the government considers it appropriate that specialised bodies focus on each of these important aspects of utility services, it is concerned to ensure that decisions of regulatory agencies in relation to utilities are more closely integrated and better informed. What this legislation does is effectively hard wire the decisions of these regulators into the commission's regulatory approach, by requiring the commission to consult with other bodies, including specialist regulators, in order to achieve a more closely integrated approach to regulation and to avoid regulatory duplication. Reciprocal obligations will also be imposed on other Victorian regulators or agencies nominated in regulations. The commission will also be required to enter into memoranda of understanding (MOUs) -- detailing respective roles and key interfaces -- with other regulators that will also be prescribed in regulations. These MOUs will detail key reciprocal obligations for consultation between the commission and other regulators, and will be made publicly available. While MOUs will be prescribed for state-based regulatory bodies, the commission will be encouraged to also enter into such formalised consultation arrangements with key national bodies, such as the Australian Competition and Consumer Commission. These initiatives will help to ensure that economic regulation is applied within an overall framework that is fully cognisant of -- and consistent with -- statutory requirements administered by environmental, health, safety and other specialist regulators.
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The commission is responsible for setting reliability standards for distribution networks in gas and electricity. In addition to its economic regulatory functions, the commission will utilise its knowledge and expertise on service standards and reliability issues in providing informal advice to government on supply reliability issues. The commission will also -- at the direction of the minister -- undertake formal inquiries into reliability of supply issues. Such a role will ensure that the commission effectively complements the existing roles of commonwealth and state bodies in security of supply. The government considers it vital that the ESC undertake its regulatory processes in a transparent and inclusive fashion. This is achieved, firstly, through a requirement for the commission to develop a charter of consultation and regulatory practice. This charter will not only ensure that the commission embraces a consultative and inclusive approach to regulation, but also that this approach is presented in a fully transparent and accessible manner. The commission will be expected to develop its charter in consultation with stakeholders, as a matter of priority. This part also provides an explicit requirement for the commission to consult with other bodies, including specialist regulators, in order to achieve a more closely integrated approach to regulation and to avoid regulatory duplication. Similar obligations to consult with the ESC will apply to other bodies nominated in the regulations to accompany the bill. The membership of the commission, as detailed in this part of the bill, will comprise a full-time chair, with additional full-time and part-time commissioners as required. All positions will be appointed by the Governor in Council, with details of the tenures of such positions set out in the bill. The broad process for decision making is also set out in this part, including convening of meetings of the commission and voting on determinations. On its establishment on 1 January 2002, the government intends that the ESC will have a chairperson and two part-time commissioners. Furthermore, from 1 January 2002, the ESC will, where feasible, include all statutory office-holders in collective decision making. Part 3 defines the commission's specific powers, which include price regulation, setting standards and conditions of service and supply, licensing and market conduct. A key concern of regulated businesses is that the regulatory process, and in particular price determinations for prescribed goods and services, need to be conducted in a transparent manner. Accordingly, a range of factors that the commission must have regard to in making determinations is listed in this part. These are: the particular circumstances of the industry and declared services for which the determination is being made; the costs of making, producing or supplying the goods or services; the cost of complying with environmental, health, safety and social legislation which applies to the regulated industry; the return on assets in the regulated industry; any relevant interstate and international benchmarks for prices, costs and return on assets in comparable industries; the financial implications of the determination for the regulated industry; any factors specified in the relevant legislation; and any other factors that the commission considers relevant. These factors will ensure that the commission is able to adopt a tailored regulatory approach that takes into account the particular characteristics of the industry concerned, including regional factors. This approach will also be fully cognisant of all costs involved in producing the service and importantly, of the financial implications of the determination for the industry. In essence, the commission's regulatory approach will be strongly focused on facilitating optimum long-term infrastructure investment in Victoria and financially viable regulated industries. In making a price determination, the commission will also need to ensure that: wherever possible the costs of regulation do not exceed the benefits; and decisions take into account and clearly articulate any trade-off between costs and service standards. While the government does not consider it appropriate to constrain the regulator to the extent of prescribing a regulatory methodology, the factors that the ESC will need to take into account, along with requirements under relevant industry legislation will move the commission further in the direction of an
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incentive-based approach to regulation that is efficient, cost effective and transparent. Part 4 of the bill is concerned with the commission's powers in relation to collection and use of information. To ensure that the commission is accountable in the use of such powers, any requirement of the commission for a person to provide information, or decision by the commission to disclose information that has been provided on the basis that it is confidential or commercially sensitive, will be subject to the right of appeal. Parts 5 and 6 deal with the commission's function to undertake inquiries and prepare reports. Part 5 outlines basic procedural requirements to be followed by the commission when undertaking inquiries and reports, including requirements for public consultation and reporting. Part 6 deals with ministerial directions to the commission to undertake specific inquiries and prepare reports. This part contains provisions enabling the minister responsible for electricity and gas industry legislation, after consulting with the minister responsible for this act, to specify the commission's objective in relation to an investigation undertaken in accordance with such a direction. These provisions have been retained from the Office of the Regulator-General Act to enable the government to direct the commission to undertake specific investigations of the impacts of full retail competition for electricity and gas. These provisions are for the purpose of protecting consumers during the transition to full retail competition in these industries and will expire on 31 August 2004. Part 7 of the bill contains a number of general provisions, including processes concerning enforcement orders and appeals. I have already outlined a number of key features of the Essential Services Commission and the regulatory system it will administer that are designed to facilitate an optimal level of long-term investment by regulated industries providing essential utility services. However, the government also fully understands the importance of these industries to their customers and has accordingly increased penalties under this bill for noncompliance with determinations of the commission or breaches of licence conditions. Penalties in such cases have been increased from $100 000 under the previous act to a maximum $500 000 under this bill, and from $10 000 per day to $50 000 per day for continuing noncompliance. These revised penalties provide the appropriate balance between a regulatory approach that encourages and facilitates investment in essential services, and one that recognises the potential for serious adverse community impacts in the event of serious noncompliance. The new penalties are also more consistent with those applying in other jurisdictions. Other penalties for information-related breaches of the Essential Services Commission Act have been amended, with increased fines and limiting the option of a custodial sentence to cases involving the deliberate provision of false or misleading information. Part 7 also contains reformed appeals provisions, which among other things considerably extend the time lines for hearing of appeals. These changes are partly in response to concerns raised by regulated businesses over the adequacy of current time lines for appeals under the ORG act and also reflect the often complex nature of economic regulation. Time lines for appeals against determinations made by the commission will be extended from the current 14 days under the ORG act to 30 working days, with the option of an additional 15 working days if required. In addition, appeal arrangements have been reformed to allow for participation by interested parties and define a clear role for the commission as the proper contradictor in appeal proceedings. The government has also recently expanded the size of the appeal panel pool from 12 persons to 24 persons. Draft regulations dealing with procedural matters of appeals and other matters were included in the government's proposal paper and will be completed prior to part 7 of this bill coming into operation. This part also requires the minister to complete a review of the act's objectives within five years of the commencement of this provision. This will not be a broad review of the commission, but rather is intended to assess whether the act's objectives and processes need to be finetuned. Part 8 of the bill deals with matters relating to the transition from the Office of the Regulator-General to the commission and details consequential amendments to other legislation. Finally, parts 9 to 15 provide a range of amendments to relevant industry legislation. Without, in this speech, going into the fine detail of these amendments, I wish to highlight three significant changes. Firstly, new objectives for the commission have been substituted into the Electricity Industry Act 2000 and the Gas Industry Act 2001. The objectives are, (a), to
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the extent that is efficient and practicable to do so, to promote consistent regulatory approaches for the electricity and gas industries, and (b), to promote the development of full retail competition in electricity and gas markets. The effect of these changes is to remove any duplication between the regulator's current objectives under these industry acts and the objectives under the Essential Services Commission Act, thereby providing a more complementary framework of objectives. Secondly, the Grain Handling and Storage Act 1995 and the Port Services Act 1995 have each been amended to include licensing provisions. These licensing arrangements have been tailored to the circumstances of these regulated industries and have been designed to impose minimal compliance costs. As foreshadowed in the government's proposal paper for the establishment of the ESC, these arrangements will, among other things, enable the regulator to recover costs related to regulating these industries. The Water Industry Act 1994 will also be amended to include a licence surcharge which, consistent with other regulated industries, will be based on the costs incurred by the commission in regulating the water sector. Thirdly, it will now be the responsibility of the minister administering the Essential Services Commission Act, and not the commission itself, to determine whether grain and ports facilities are regulated. This will ensure that threshold decisions on whether regulation is appropriate are made by government, with the commission responsible for administering regulatory approaches in line with its statutory objectives, functions and powers. In respect of all the industry acts, the bill clarifies that the minister responsible for setting licence fees and charges is the minister responsible for administering the Essential Services Commission Act, after consultation with the minister responsible for the relevant industry act. In determining appropriate fees and charges, the minister will have regard to the total costs of the commission that are incurred, or likely to be incurred, in administering its regulatory responsibilities in respect of the particular regulated industry. I wish to make a statement pursuant to section 85(5) of the Constitution Act 1975 of the reasons why the bill alters or varies section 85. Clause 63 of the bill provides that it is the intention of clauses 44(7), 51(7) or 62(1) to alter or vary section 85 of the Constitution Act 1975. Clauses 44(7) and 51(7) of the bill preserve provisions of the Office of the Regulator-General Act 1994 and continue to exclude civil proceedings for damage that may be suffered in respect of the provision of information or documents, in the context of an investigation or inquiry by the commission. The reason for limiting the jurisdiction of the Supreme Court with respect to these matters is to give persons who wish to make statements or provide information a degree of confidence that their statements or information can be made or given without fear of litigation. This is likely to enhance the quality of the submissions and information made available to the commission, and thus enhance the quality of its reports and decisions. Clause 62(1) of the bill provides, as does the corresponding provision in the Office of the Regulator-General Act 1994, that proceedings cannot be brought in respect of a determination or provisional or final order except on the grounds that there was no power to make the determination or order or that the procedural requirements in relation to the making of the determination or order have not been complied with. The government believes that this clause does not preclude questions of errors of law being considered by the court. The bill provides for an improved appeals process, which will satisfy the requirements of appellants being given a fair hearing and a considered decision on any appeal being made. It is necessary to ensure that where the commission makes orders regarding compliance with determinations or with the terms of any licence, such orders should operate without risk of questions challenging the substance of the order being referred to court, except on the grounds outlined above. This is necessary to ensure that legitimate regulatory decisions are directly and effectively enforceable and that in turn, the integrity of the regulatory framework administered by the commission is maintained. In conclusion, this legislation has been developed after an extensive public consultation process with key stakeholder groups. The development of the ESC legislation and related reforms has been a very significant and complex undertaking. I would like to thank Mr John Lenders, MP, Parliamentary Secretary for Treasury and Finance, for playing a key role in consulting with the community in the development of the ESC proposal and legislation. I would also like to thank the Department of Treasury and Finance and its ESC project group -- headed up by Dr Stephen Rimmer -- for providing high-quality and insightful advice to the government regarding the ESC.
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In establishing a new and improved utility regulator for Victoria, this bill embodies the government's commitment to delivering triple bottom-line outcomes within a regulatory climate that pushes the boundaries of world's best practice. It will provide greater consumer protection and access to decision-making processes and provide greater certainty and predicability for long-term investment in viable utility infrastructure. It will also enhance service reliability and facilitate a regulatory approach that closely integrates economic, health, safety, environmental and social aspirations. I commend the bill to the house. Debate adjourned on motion of Ms ASHER (Brighton). Debate adjourned until Thursday, 6 September. PERSONAL EXPLANATION