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ESSENTIAL SERVICES COMMISSION BILL
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23 August 2001
Second Reading
BRUMBY
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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