Electricity Supply Industry Expert Panel An Independent Review of the Tasmanian Electricity Supply Industry Final Report Volume I March 2012 Electricity Supply Industry Expert Panel The Hon Lara Giddings MP The Hon Bryan Green MP Treasurer Minister for Energy and Resources Level 11 Level 10 15 Murray Street 15 Murray Street HOBART TAS 7000 HOBART TAS 7000 Dear Treasurer and Minister, In accordance with Section 20 of the Electricity Supply Industry Expert Panel Act 2010, I am pleased to provide you with the Panel’s Final Report: An Independent Review of the Tasmanian Electricity Industry – Final Report. The Final Report presents the Panel’s findings and recommendations against its Terms of Reference. Most importantly, the Final Report contains the Panel’s recommended actions to inform the development of a Tasmanian Energy Strategy. The Final Report is the culmination of 17 months of detailed, evidence-based investigation, which has included extensive and highly involved consultation with both industry participants and the broader Tasmanian community. Our focus has been the long-term interest of Tasmanians. As we have noted throughout the Review, the electricity industry will make the best contribution to the growth and development of Tasmania and to the economic welfare of Tasmanians if it is operated on the most economically efficient basis possible. In examining the past and current performance of the sector, the Panel established the following overarching policy objective: ‘To promote a safe, secure, reliable, efficient and sustainable electricity supply industry, capable of providing electricity services at efficient prices to Tasmanian households and businesses, over the long term’. In submitting its Final Report, the Panel’s simple message is that effective retail competition for households and small businesses will not be delivered without structural reform at the wholesale level, and this is necessary to deliver the above objective. The Panel has formulated a structural reform package that will facilitate genuine and enduring retail competition and deliver significant economic benefits to the State. The Final Report also explains why alternative reform measures – including regulatory measures - will not deliver the kind of vibrant electricity market seen in other parts of the National Electricity Market, and which is possible in Tasmania if the structural reform challenge is embraced and effectively implemented. The Panel has undertaken significant preliminary work with the Australian Energy Regulator, Australian Energy Market Operator, national market participants and other expert stakeholders to ensure that its proposed reforms are compatible the technical and commercial features of the industry. Previous reform of the TESI has shown that the people, knowledge and skills required to successfully deliver structural change of the kind recommended by the Panel are very much available, so long as there is genuine and sustained commitment to the ultimate outcome. The Minister for Energy noted when introducing the legislation to establish the Panel, that the Government “…knew at the time [of NEM entry] that the road to reform was going to be long and arduous, but that meaningful change is rarely achieved without significant effort. The focus has always been on creating the long-term setting that would focus the electricity businesses on their core tasks, but also to promote maximum opportunity for competition to drive efficiencies and limit future cost and therefore price rises, while maintaining high standards of service and reliability”. The proposed structural changes provide an opportunity to realise the kind of vibrant competition that was envisaged when the Tasmanian Government initially embarked on the energy market reform project in the 1990s. The Final Report also contains a number of priority issues that the Panel considers require the Tasmanian Government’s immediate attention. These include: the regulatory framework for determining non-contestable customer electricity prices; the commercial position of the Tamar Valley Power Station; and the governance and oversight arrangements that apply to the State-owned energy businesses. The other key aspect of the Panel’s task has been to review the historical performance of the Tasmanian electricity supply industry. In doing so, the Final Report addresses a number of issues that have been matters of public discussion in Tasmania for some time. The Panel hopes that these findings will lead to a better community understanding of what has become an increasingly complex sector. A review of this nature could not be undertaken without the contributions of a significant number of people. On behalf of the Panel, I wish to express our appreciation to the many individual Tasmanians who provided submissions and participated in public forums, market participants and institutions, and Tasmanian Government agencies. Finally we wish to record our gratitude for the professionalism and dedication of the Secretariat: Mr Adrian Christian, Ms Sophie Reid, Mr Luke Gregory, Mr Scott Lancaster and Mrs Lisa Austin. Yours sincerely John Pierce Chairman 29 March 2012 Table of contents Foreword ..................................................................................................................................... i The Panel members ................................................................................................................iv Executive summary ................................................................................................................. v Key findings and recommendations .................................................................................... xvi Key findings ............................................................................................................................ xvi Recommendations ................................................................................................................ xx 1. Structure of the report ................................................................................................... 1 2. The Panel’s task .............................................................................................................. 3 2.1. What the Panel’s Review is about ........................................................................... 3 2.2. The Scope of the Review ........................................................................................... 7 PART A: IMMEDIATE PRIORITIES FOR ACTION 3. Summary assessment of the TESI ................................................................................ 10 3.1. The Panel’s TESI Policy Framework ......................................................................... 10 4. Priority 1: Non-contestable customer pricing .......................................................... 25 4.1. The determination of the wholesale energy cost allowance ........................... 27 4.2. An appropriate framework for determining the wholesale cost of energy ... 30 4.3. The way forward ....................................................................................................... 32 5. Priority 2: Tamar Valley Power Station ...................................................................... 35 6. Priority 3: Governance Reform ................................................................................... 43 6.1. Introduction ................................................................................................................ 44 6.2. Clearer Shareholder ownership objectives .......................................................... 46 6.3. Stronger Shareholder focus on business performance ...................................... 51 6.4. Effective Shareholder oversight and strategic policy functions ....................... 54 6.5. Enhancing public reporting and accountability ................................................. 56 6.6. Transparent identification, delivery and funding of non-commercial activities ..................................................................................................................................... 60 6.7. Confidence in the independence of regulatory processes ............................. 62 6.8. The way forward ....................................................................................................... 64 7. The merits of retail competition ................................................................................. 67 7.1. Merits of retail competition versus continued regulation .................................. 68 7.2. Development of the Retail Market to Support FRC ............................................ 71 7.3. Effectiveness of retail competition to deliver sustained choice ....................... 73 8. Assessment of current market structure ................................................................... 75 8.1. Introduction ................................................................................................................ 76 8.2. Retail market competition ....................................................................................... 77 8.3. Effectiveness of the wholesale market ................................................................. 88 PART B: THE NEED FOR STRUCTURAL REFORM 9. Recommended approach: Structural Reform Package .................................... 100 9.1. Introduction .............................................................................................................. 101 9.2. GenTrader