On 2 February 2017 the Australian Energy Market Commission (AEMC) made a final rule determination and more preferable final rules which would amend the relevant provisions of the National Electricity Rules (NER) and National Gas Rules (NGR) to:
enhance the operation of the retailer insolvency cost pass-through provisions;
remove the requirement for a retailer to provide credit support, except in the case of a history of late payment of distributor’s invoices by a retailer. In the event of late payment, a retailer may have to provide credit support in the amount of the last invoice received which triggered the late payment provision; and
retain the existing credit support provisions so that they continue to operate as between any distributor and retailer, where that distributor currently holds a credit support instrument from that retailer. This requirement exists given the accrued right of the distributor under the existing contractual arrangements associated with the credit support instrument.
The Commission considers that there is no need at this time for any ex-ante mechanism in relation to the retailer-distributor arrangements, with the exception of the late-payment provisions, which would require costs to be incurred by retailers, and therefore their customers, prior to a retailer default occurring.
Electricity and gas distributors provide connection and supply of energy services to retail customers directly. The retailer is responsible to pay the network charges, incurred by its retail customers, to the distributor. A time lag exists between when the network services are provided to these customers and when the payment for those services is made by the retailer. Due to the combination of a time lag and distributors' not charging customers directly, distributors face the risk of retailer default and the subsequent non-payment of network charges. However, distributors are unable to price this risk into their relationship with retailers. Furthermore, distributors are obliged to deal with any and every retailer, regardless of each retailer's level of default risk.
The provision of credit support is one of a number of regulatory and commercial mechanisms available to distributors to manage the risks associated with retailer default. Credit support serves to limit distributors’ financial exposure to retailer default.
The rule change requests and their consolidation
The AEMC received two rule change requests from AGL, on 19 January 2015, to amend the retailer-distributor credit support requirements, for the NER and NGR.
Under AGL’s proposals, retailers with a Standard and Poor’s (or equivalent) credit rating of BBB- or above would not be required to provide any credit support to distributors. A retailer with a credit rating below BBB- would be required to provide credit support in an amount that equates the value at risk to the distributor to the amount that would be at risk if the retailer was rated BBB-.
AGL considered that the rule change proposals better align the risk of retailer default with the costs of providing credit support.
In addition to AGL’s rule change requests, the AEMC received a rule change request from the Council of Australian Governments Energy Council (COAG Energy Council) to amend the retailer insolvency cost pass-through provisions in the NER. A consultation paper was published in relation to the retailer insolvency cost pass-through rule change request and the first round of consultation closed on 11 December 2014. Submissions on the consultation paper indicated stakeholders saw a link between the retailer insolvency cost pass-through rule change request and the retailer-distributor credit support rule change requests.
Consequently, the AEMC consolidated the COAG Energy Council’s rule change request (ERC0172) with AGL’s rule change request relating to the NER. The two requests will be treated as one request for the purposes of Part 7 of the National Electricity Law and will be addressed under the process for the AGL rule change request (ERC0183).
Background information and documentation of the COAG Energy Council’s rule change request can be found here.
The AEMC also received a rule change request from Jemena Gas Networks, on 25 September 2015, to amend the retailer insolvency cost pass-through provisions in the NGR. On 22 October 2015, the AEMC initiated the rule change request and an information notice was published. The information notice sought stakeholder submissions on issues raised in relation to the retailer insolvency cost pass-through provisions in the NGR. Submissions on the information notice closed on 26 November 2015.
The AEMC consolidated the consideration of the Jemena rule change request (GRC0035) with AGL’s rule change request relating to the NGR. The two requests are treated as one request for the purposes of Chapter 9 of the National Gas Law. Furthermore, this consolidated request is addressed under the process for the AGL rule change request (ERC0183).
Background information and documentation on the Jemena rule change request, including the information notice can be found here.
On 22 October 2015, the AEMC published an options paper to facilitate consultation on the consolidated rule change requests proposing changes to the retailer-distributor credit support requirements and the retailer insolvency cost pass-through provisions in the NER and NGR.
Submissions on the options paper closed on 26 November 2015. 17 submissions were received.
On 18 February 2016, the Australian Energy Market Commission (AEMC) gave notice that it was extending the period of time for making a draft determination and, if needed, a draft rule, under section 107 of the National Electricity Law and s. 308 of the National Gas Law until 28 July 2016.
This extension of time was required as a result of the sufficiently complex issues raised by the rule change requests including the need to develop various options to address the risks related to retailer default.
The AEMC had previously extended the time for making a draft rule determination relating to these rule change requests to 18 February 2016.
The AEMC published the draft rule determination and draft more preferable rules on 27 October 2016. Submissions on the draft rule determination closed on 22 December 2016