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Agenda Item 10.3-Micro Eco Reform-Att A-Ann 1
AUSTRALIA (QUEENSLAND) – ANNEX 1
1.
Introduction
This Annex sets out our findings in relation to the current status of implementation of the
IPP Principles in Queensland.
In relation to each Principle the current status of implementation is described. Where
possible and appropriate, we have identified potential barriers or impediments to improved
implementation of the Principles.
These findings reflect research carried out in the period January – April 2000. In addition
to non-confidential material already in the possession of the consultants or derived from
publicly available sources, a number of interviews were held with representatives of
industry, government, and legal and other advisers.
2.
Background
2.1 Recent developments in the Queensland electricity sector
The electricity sector in Australia has, until recently, been dominated by publicly
owned and vertically integrated utilities. However, there has been substantial reform
and restructure of the Australian electricity industry since 1990.
In broad terms, the Queensland reforms have encompassed the following:
2.2

restructures of the Queensland Government-owned electricity utilities which
now consist of three generation corporations; one transmission corporation,
two distribution corporations, two retail corporations and a trading
corporation (which bids the government’s purchase obligations under PPAs
which predate the reforms);

introduction of competition in the wholesale electricity market, initially
through the establishment of an interim Queensland wholesale market and
since December 1999, through participation in the national electricity market
(together with New South Wales, Victoria, South Australia and the Australian
Capital Territory);

staged introduction of competition in the retail supply of electricity; and

interconnection of the Queensland electricity grid with that of New South
Wales grid, which is scheduled for completion in December 2000.
The role of IPPs in Queensland
Queensland generating capacity (currently approximately 8000MW total) is currently
provided by predominantly coal fired power stations located in central and southern
Queensland. There is also some pumped storage hydro in southern
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Queensland, some limited run of river hydro-electric capacity in Far North
Queensland and various simple cycle gas turbines.1
In the Queensland electricity environment, IPPs encompasses any private sector
generation investment and this does not necessarily include supporting PPAs.
There are a number of existing IPPs in Queensland, including:

Gladstone Power Station, a 1,680 MW coal-fired power station (the most
significant IPP in Queensland);

Mt Stuart (Townsville) and Townsville (Yabulu) which are peaking gas
turbine stations of 300 MW and 169 MW respectively;

Oakey GT, a 276 MW peaking gas turbine station in southern Queensland;

Boral’s Roma GT, a 74 MW gas turbine station in southern Queensland;
and

some co-generation capacity from a number of Queensland’s sugar mills;
Gladstone, Mt Stuart, Yabulu and Oakey power stations predate the recent reforms in
the Queensland electricity industry and are all supported by PPAs. Gladstone Power
Station is also the subject of a State Agreement, which is supported by legislation,
the Gladstone Power Station Agreement Act 1993.
New generation projects are being developed in the competitive market environment,
which has moved away from the use of PPAs. In particular, it is extremely unlikely
that a new generation project would be the subject of a State Agreement.
Committed new generation in Queensland is predominantly through new coal fired
IPPs:

Callide C, 840 MW coal fired generator under construction in central
Queensland, is a joint venture between the private sector and CS Energy, one
of the Queensland government owned generation companies;

Millmerran, 840 MW coal fired power station under construction in southern
Queensland;

Tarong North, a 450 MW expansion to the existing 1,400 MW Tarong power
station2.
1
Powerlink Queensland “Annual Planning Statement 2000”
2
Although Tarong is a Queensland government owned generator, Tarong North has been mentioned in the list of
“IPPs” as the Queensland Government has indicated that for Tarong North to proceed, Tarong must find a joint
venture partner for the expansion [Source: Carolyn Martin, Fitch IBCA “Credit Risks and Structural Industry
Issues in the Queensland Utility Sector”]
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There are also a several potential IPPs that are considered to be in an advanced stage
of negotiation3:

Wambo Power Ventures for a 450MW gas turbine power station at Kogan
near Chinchilla4; and

CEPA (Kogan Creek) Holding for a 682MW coal fired power station at
Brigalow near Chinchilla, planned commercial operation in fourth quarter
2002.
Other potential developments include an IPP co-generator (350MW capacity) to be
located at Gibson Island, Murarrie, with a proposed commissioning date of second
quarter 2003.
Prior to the establishment of the Queensland interim wholesale electricity market in
1997, all IPPs were contracted to sell their energy to a single government owned
corporation.
This policy has now changed. New IPPs are expected to sell their capacity through
the electricity spot market. It is open to new IPPs to seek to negotiate the sale of their
energy to a wholesale buyer prior to its export into the Queensland network.
However, this is a matter of commercial negotiation between the parties and is more
likely to arise in the case of an “embedded”5 IPP seeking to sell its output to the local
government owned retail corporation. Otherwise, the arrangements would need to be
framed to fit within the national electricity market procedures and could require the
purchaser to become the virtual “generator” for the IPP, bidding and selling its output
through the spot market. Of the committed and potential IPP projects described in
paragraph 1.2 above, only Gibson Island is an “embedded” generator.
The main difficulty faced by IPP projects in Queensland appears to be the newness of
the competitive wholesale market in Queensland and the other “national market”
jurisdictions. This includes the commercial difficulties of obtaining appropriate
electricity hedge coverage, which is also a new and therefore, uncertain, market.
The number of approvals required by the IPP and the length of the approval
processes also pose challenges which a proposed IPP must manage.
As a result of the recent Queensland Energy Policy (see below) and its “no more
coal” initiative, limitations as to fuel source are now also issues for future IPP
projects.
3
Powerlink Queensland “Annual Planning Statement 2000”
4
Powerlink Queensland “Annual Planning Statement 2000”. The Annual Planning Statement 2000 states that the
planned commissioning date for Wambo of March 2001 is regarded by Powerlink as “optimistic”.
5
An embedded generator is connected to the lower voltage distribution network, rather than having a direct
connection with the transmission network.
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3.
Institutional and Regulatory Structures
3.1 Principle 1: Legislative and regulatory framework
3.1.1 Energy sector policies formulated to create a stable framework for
power sector development
(a)
Clear, published and consistent energy sector policies
The Queensland Government, in its written energy “Queensland Energy
Policy - A Cleaner Energy Strategy” released in May 2000, lists its
objectives as being to:

“diversify the State’s energy mix towards the greater use of gas
and renewables;

facilitate the supply of abundant and competitively priced gas in
Queensland;

facilitate the development of gas fired power stations, particularly
a base load power station in Townsville; and

reduce the growth in greenhouse gases.”6
The stated initiatives of the Cleaner Energy Strategy include:

“A licence scheme which will require electricity retailers that
operate in Queensland to source 15 per cent of their electricity
sold in Queensland from gas fired or renewable generation from 1
January 2005;

The Government will work with the developers of the PNG gas
pipeline, AGL Petronas to advance the construction of the
Townsville-Gladstone section of the PNG gas pipeline;

Subject to the successful facilitation of gas into Townsville, the
Government will build a gas fired base load power station in
Townsville or negotiate the conversion of one or more of the
existing peaking stations in Townsville to gas and base load
operation.”7
The Cleaner Energy Strategy represents the convergence of Queensland
Government gas and electricity policies and is also consistent with the
policy of regional development.
6
Queensland Government “Queensland Energy Policy - A Cleaner Energy Strategy”, Executive Summary
7
Queensland Government “Queensland Energy Policy - A Cleaner Energy Strategy”, Executive Summary
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(b)
Environmental policy objectives
The Queensland Government released its Energy Policy in May 2000.
One objective is to limit greenhouse gas emissions. See Questions 2 and
8 above.
The national market is not used as a mechanism to implement
environmental policies. On the contrary, the fuel source of generation bid
into the market is irrelevant to the operation of the market. The objects of
the market state that “a particular energy source or technology should
not be treated more favourably or less favourably than another energy
source or technology”8
(c)
Established legislative framework
The regulatory framework for the electricity industry in Queensland is
established by the following legislation and regulations or other
instruments made thereunder:
(d)
8

Electricity Act 1994 (Qld) and the Electricity Regulation 1994;
The Electricity Act is the primary legislation in Queensland for
the regulation of the electricity industry (both publicly and
privately owned enterprises). It includes a licensing regime, by
sector, for generation, transmission, distribution and retail supply
activities. The Electricity Act operates in conjunction with and
accommodates the National Electricity Law.

National Electricity Law, which is the means by which the
National Electricity Code (see below) is implemented. The
National Electricity Law is co-operative legislation that has been
adopted by all the jurisdictions participating in the national
electricity market in Australia. These are the jurisdictions in the
eastern and southern states and territories of mainland Australia,
which have, or (in the case of Queensland, are soon to have)
interconnected electricity grids. In Queensland, the National
Electricity Law has been adopted by the Electricity - National
Scheme (Queensland) Act 1997; and

National Electricity Code. The National Electricity Code sets out
the rules for the “national electricity market”, a competitive
market for the wholesale sale of electricity, which operates in the
eastern and southern states and territories of mainland Australia. It
also sets out the arrangements for access to electricity networks in
those jurisdictions.
Regulatory bodies
National Electricity Code, clause 1.3(b)(5)
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One of the principle objectives of the national electricity market and
associated reforms has been to introduce a “level playing field” for
participants, both public and private, in the electricity sector.
Accordingly, there has been emphasis placed on the independence, both
actual and perceived, of regulatory bodies within the sector.
The areas of responsibility are divided between a number of regulatory
bodies:
Queensland regulatory bodies
 The regulator
The Chief Executive of the Queensland Department of Mines and
Energy is the “regulator” for the purposes of the Electricity Act,
responsible for granting and administering the licences for
undertaking electricity activities in Queensland (called
“authorities”). The regulator must take government policies into
account when granting authorities. Material decisions of the
regulator under the Electricity Act may be appealed, ultimately to
one of the Queensland courts.
 Queensland Competition Authority
The Queensland Competition Authority (QCA) is an independent
statutory body established by the Queensland Competition
Authority Act 1997 with powers and functions in relation to
pricing practices of Queensland government monopoly business
activities, competitive neutrality and access to services. A
government business activity is a “government monopoly
business activity” if it is declared as such by the regulations or by
the Premier and Treasurer of Queensland.
It is intended that the QCA will assume responsibility for
regulation of access to distribution networks (lower voltage
networks) and distribution pricing in December 2000. In the
transition phase, these functions are being carried out by the
Queensland Minister.
Additional powers and functions are given to the QCA in relation
to the Queensland electricity industry. The QCA may implement
and enforce “conduct rules” applicable to all or specified types or
classes of electricity entity. Conduct rules appear to be designed to
assist competition in retail supply of electricity - for example,
procedures for change of retailer. However, the matters with
which conduct rules may deal is not limited solely to retail
operations. No conduct rules have yet been formulated.
 The Minister
The Minister with responsibility for administering the Electricity
Act is currently responsible for regulation of access to and pricing
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for transmission and distribution networks. This is a transitional
arrangement only. Distribution regulation will be transferred to
the QCA in December 2000 and transmission regulation will be
transferred to the Australian Competition and Consumer
Commission (“ACCC”) on 1 January 2002.
 Energy arbitrators
It is also proposed to appoint independent energy arbitrators to
hear disputes between electricity entities and customers,
determine matters in dispute and make orders against electricity
entities accordingly.
These arrangements are currently being considered by Queensland
Parliament in an Electricity Amendment Bill 2000.
Commonwealth or other “national” regulatory bodies
 Australian Competition and Consumer Commission (ACCC)
The ACCC is an independent statutory body established under the
Trade Practices Act 1974 (Commonwealth).
The ACCC has responsibility for authorising the National Electricity
Code and any changes thereto. In the absence of such authorisation,
the operation of a spot market for electricity and the setting of a single
half hourly electricity spot price for each region might infringe the
provisions regarding restrictive trade practices of the Trade Practices
Act. The ACCC has given interim authorisation of the Code to enable
the commencement of the national electricity market. The process for
full authorisation which is under way includes public consultation and
requires the ACCC to be satisfied that the public benefits of the
arrangements outweigh any lessening of competition.
The ACCC will assume responsibility for the regulation of access to
the Queensland transmission network and transmission pricing on 1
January 2002.
 National Electricity Code Administrator (NECA)
NECA is a company limited by guarantee, the members of which
are the jurisdictions participating in the national electricity market
(which includes Queensland). The board of directors of NECA are
appointed by these jurisdictions.
The responsibilities of NECA include administration of the
National Electricity Code, including institution of action for
non-compliance and consideration, consultation and process of
proposed changes to the Code.
 National Electricity
(NEMMCO)
Market
Management
Company
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NEMMCO is also a company limited by guarantee, the members
of which are the jurisdictions participating in the national
electricity market. The board of directors of NEMMCO is
appointed by these jurisdictions.
NEMMCO’s
responsibilities
include
operating
and
administering the electricity spot market, maintaining power
system security, coordinating power system planning and
registration of participants in the national electricity market.
 Australian Securities and Investment Commission (ASIC)
ASIC is an independent statutory body established by the
Australian Securities and Investment Commission Act 1989
(Commonwealth).
With the introduction of the physical electricity spot market,
most participants (buyers and sellers) have sought to manage
their exposure to spot price fluctuations by private electricity
hedge contracts, which are purely financial in nature. It is
arguable that these arrangements may constitute “futures
contracts” within the meaning of the Corporations Law. The
Corporations Law prohibits trading in futures contracts unless
conducted on a futures exchange or in an exempt futures market.
An exempt futures market has been declared for such purposes
pursuant to the Corporations (Exempt Futures Market - National
Wholesale Electricity) Declaration 1999.
ASIC is responsible for administering the Declaration and for
the registration of persons pursuant to that Declaration.
Registration facilitates the person entering into electricity hedge
contracts.
(e)
Internal consistency among regulatory structures
Most of the approvals which are required for an IPP are approvals from
Queensland Government bodies or independent bodies established under
Queensland legislation.
The consistency between different government levels is discussed below.
As a general comment, there is sometimes inconsistency in decision
making within a single Queensland Government department. This has
been observed in the different approaches taken by head office and
regional offices of one department. In some instances, a regional office is
permitted to adopt a different view if it is an “operational decision” but if
the matter is a “policy” decision it must defer to head office.
Commonwealth approval may be required if, for example, the IPP will
involve foreign investment or if the IPP invokes an environmental trigger
requiring Environment Australia’s approval or review.
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(f)
Transparency of regulations
Electricity Act
The subject matter for which Regulations may be made are specified in
the Electricity Act 9 and include conditions of sale and supply,
requirements and standards, matters concerning generation, transmission
and supply, conditions of authorities and approvals, prohibited interests
and other general matters. Regulations made under the Electricity Act are
already in place. The Queensland Governor in Council has the power to
make Regulations under the Statutory Instruments Act10, including new
or amending regulations. In practice, the responsible Minister proposes
the draft Regulations. In some cases a ‘Regulatory Impact Statement’
(RIS) must be prepared about the proposed Regulation. The situations
when this is required are set out in the Statutory Instruments Act11 and
includes when a proposed Regulation is likely to impose appreciable
costs on a community. Generally, a RIS must include information about
the policy objectives of the proposed legislation and how these will be
achieved and a statement about the benefits and costs of implementing
the Regulation. Preparation of a RIS must be notified in the Queensland
Government Gazette and newspaper, and the public can make comments
on the proposed Regulation. Finally, a Regulation must be tabled in the
Legislative Assembly within 14 sitting days after it is notified in the
Queensland Government Gazette. Once made, Regulations are published
in the Queensland Government Gazette that is publicly available.
National Electricity Law
As mentioned above, the National Electricity Law is cooperative
legislation between the jurisdictions in which the national electricity
market operates.
The primary legislation is South Australian legislation, the National
Electricity (South Australia) Act 1996. The National Electricity Law is a
schedule to the National Electricity (South Australia) Act 1996.
Therefore, the South Australian parliament has the power to amend the
National Electricity Law by means of a bill approved by the South
Australian parliament. Bills and parliamentary debates are publicly
available.
The Electricity - National Scheme (Queensland) Act 1997 provides that
the National Electricity Law (as amended from time to time) applies as a
9
Electricity Act, schedule 264
10
Statutory Instruments Act, section 59
11
Statutory Instruments Act, section 43. The Act also specifies cases where the preparation of an RIS is not
necessary, see section 42 and 46.
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law of Queensland and regulations made under the National Electricity
(South Australia) Act 1996 apply as regulations in Queensland.
In practice, the approval of the responsible Ministers in the other
jurisdictions participating in the national market would be obtained
before proceeding with an amendment to the National Electricity Law.
The South Australian Governor may make regulations under the National
Electricity (South Australia) Act 1996 provided there is a unanimous
recommendation of the responsible Ministers of the jurisdictions
participating in the national electricity market. Regulations are published
in the South Australian Government Gazette, which is publicly available.
National Electricity Code
The National Electricity Code, which contains the detailed rules and
procedures for the operation of the national electricity market and the
maintenance of power system security, sets out procedures to initiating
and implementing changes to the Code.
Although changes to the Code are made by NECA, NECA has extremely
limited powers to implement changes unless those changes have been
recommended by a “Code Change Panel”.
Any person may suggest a change to the Code by a written submission to
NECA. Except in certain limited circumstances, NECA must refer the
submission to the Code Change Panel. NECA may also refer unsolicited
suggested changes to the Code Change Panel. The Code Change Panel is
established by NECA and consists of 3 persons - the chief executive of
NECA and 2 other appropriate persons who NECA considers to be
independent of any Code Participant. In making its recommendations, the
Code Change Panel must consult with, and invite comments from,
persons it considers to have interest in the changes.
Before implementation, changes to the Code are also subject to scrutiny
from the ACCC. As mentioned above, the ACCC has given the Code
interim authorisation. The process for full authorisation of the Code
(including any changes), which is required for compliance with the Trade
Practices Act, involves public consultation.
(g)
Equal regulatory treatment of utilities and the business sector
The Electricity Act contains some provisions that apply only to
Queensland government owned participants in the electricity sector “State electricity entities”. However, these are predominantly transitional
matters designed to manage the transition to the competitive market,
rather than to give favourable treatment to public electricity utilities. This
includes a Governmental power of direction over State electricity entities
which may be invoked in certain circumstances related to the reform
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processes. This does not apply to other electricity entities, such as private
sector IPPs.
The Government Owned Corporations Act contains corporate provisions
which are applicable to the Queensland government owned electricity
entities.
Otherwise, the regulatory framework applying to the Queensland
electricity industry does not differentiate between public electricity
entities and private sector IPPs.
(h)
Conclusions
There is a clear and established legislative and regulatory framework in
Queensland that does not discriminate against IPPs.
The recent Queensland Energy Policy represents the convergence of
electricity and gas policies in Queensland. However, the “no more coal
fired generation” aspect of the policy means that there are now
limitations on the fuel type of future IPPs to gas and other renewables
and, until the construction of the proposed further gas pipelines in
Queensland, there will be some uncertainty as to sourcing this fuel. In
addition, at this stage, it is unclear how some of the initiatives announced
in the policy will be implemented and therefore, the impact of these
initiatives on IPPs cannot as yet be fully analysed.
The Department of State Development does play an important role in the
approval processes. Although there is not currently a complete “one stop
shop” for the approvals required by an IPP in Queensland, the
Department of State Development does assist major/significant projects
in Queensland by coordinating the impact assessment process. The
approval processes can be lengthy. However, this is often due to the
transparency and public consultation aspects of these processes that are
consistent with the objectives.
Although there is separation between regulatory bodies and utilities in
Queensland, the number of regulatory bodies does represent an area of
potential confusion or uncertainty. This has arisen as a result of the
division of responsibilities between the State and the “national” market.
Access to and regulation of network pricing is currently undertaken by
the Minister rather than an independent body. However, this is a
transitional arrangement only, with responsibility for these functions to
shortly be transferred to independent bodies. Reduction of the number of
regulatory bodies would require the State to transfer responsibility for
distribution regulation and pricing to the ACCC. This is unlikely in the
foreseeable future.
3.1.2 Energy sector policies formulated to facilitate competition
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(a) Current
restructuring
status
of
policies
for
power
sector
reform
and
Significant and widespread reform of the electricity industry has been
introduced in Queensland over the past five years. These have been
implemented in conjunction with the co-operative introduction in the
southern and eastern states of Australia of a competitive wholesale spot
market for electricity. The Queensland reforms have encompassed the
following:

Restructuring of the Queensland Government-owned electricity
utilities into three generation corporations; one transmission
corporation, two distribution corporations, two retail corporations
and a trading corporation (which bids the government’s purchase
obligations under PPAs that predate the reforms). The restructures
have been completed.

Introduction of competition in the wholesale electricity market,
initially through the establishment of an interim Queensland
wholesale market and since December 1999, through participation
in the national electricity market (together with New South Wales,
Victoria, South Australia and the Australian Capital Territory).

Staged introduction of competition in the retail supply of
electricity, with the threshold for contestability being gradually
decreased. At present, consumers of more than 0.2 GWh per
annum may choose their electricity retailer.

Interconnection of the Queensland electricity grid with that of
New South Wales grid, which is scheduled for completion in
December 2000.
An initial distribution link (“DirectLink) between the two grids in
northeastern New South Wales is due to commence operation shortly.
The capacity of Directlink is 180 MW.
A transmission link (QNI) between the New South Wales (Armidale) and
Queensland (Tarong) grids is scheduled for completion in December
2000. The capacity of QNI is 500MW import to Queensland and
1000MW to New South Wales.
(b)
Separation between generation and transmission functions
There is separation of the four sectors (generation, transmission,
distribution and retail) in Queensland.
This was initially achieved by the restructure of the public electricity
utilities into separate legal entities for each sector (as described above).
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The Electricity Act requires a different authority to be held for activities
in each sector. To maintain an appropriate level of separation, the
Regulations under the Electricity Act prohibit cross ownership between
certain sectors. A distributor may not hold a retail authority. A generator
may not hold a retail authority with a retail area12 and a retailer with a
retail area may not hold a generation authority. This applies only to the
entities themselves and does not limit the operations of a subsidiary or
other affiliate.
An access code, which establishes the means and process by which
persons, including private generators, may gain access to transmission
and distribution facilities is contained in the National Electricity Code. In
broad terms, the process is as follows:

the person seeking access (applicant) may obtain preliminary
information by making a “connection enquiry”;

the network service provider must respond to a connection
enquiry within specified timeframes;

the applicant may make a formal application to connect (it is not
necessary for the applicant to have first made a “connection
enquiry”);

in response to an “application to connect”, the network service
provider must provide an “offer to connect”. An offer to connect
must “contain the proposed terms and conditions for connection
to the network ....and must be capable of acceptance by the
Connection Applicant so as to constitute a connection
agreement”.13 Furthermore, the offer to connect “must be fair and
reasonable and must be consistent with the safe and reliable
operation of the power system”.14
It is open to the applicant and the network service provider to negotiate
the terms of the connection but the process is designed to give an
applicant certainty that a connection agreement can be established in any
event without the need for such negotiations.
The Code includes guidelines as to what is “fair and reasonable”.
Regulation of the above process, including the resolution of disputes as to
whether an offer to connect is “fair and reasonable” and regulation of
network pricing, is as follows:
12
A retailer who is authorised to supply non-contestable customers in the specified retail area as well as contestable
customers throughout Queensland. There are only 2 - Energex Retail and Ergon Energy. Energex Retail is
significantly larger than Ergon Retail.
13
National Electricity Code, clause 5.3.6(b)
14
National Electricity Code, clause 5.3.6(c)
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


(c)
As a transitional matter, the access to both transmission and
distribution networks is regulated by the Minister under the
Electricity Act;
It is intended that on and from mid-December 2000, access to
distribution networks will be regulated by the QCA;
Responsibility for regulation of access to Queensland
transmission networks will move to the ACCC on and from 1
January 2002.
Complementary development of transmission grids
Various initiatives implemented under the National Electricity Code are
designed to assist the development of transmission and distribution
networks in Queensland, New South Wales, Victoria, South Australia
and the Australian Capital Territory. These do not distinguish between
private and public sector developments.
In particular:

as the transmission network service provider in Queensland,
Powerlink Queensland must conduct and release an annual
planning review for Queensland networks in conjunction with the
Queensland distribution network service providers;

NEMMCO has established an Inter-regional Planning Committee
in accordance with the Code to:

assist NEMMCO in preparation of the annual Statement of
Opportunities;

undertake annual planning reviews of the interconnected power
system through open consultative processes; and

assess all applications to connect made by persons seeking to
establish new interconnectors between regions.

NEMMCO prepares and publishes an annual Statement of
Opportunities concerning:

the performance of the existing transmission systems;

power transfer capabilities between and within transmission
networks; and

the adequacy of the transmission systems to meet the forecast
power transfers over a period of 10 years using the most recent
forecasts.
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These initiatives are designed to assist in identifying the necessity for
augmentations or extensions of networks and, in consultation with
participants and other interested persons, to identify options.
These initiatives are not intended to preclude or prevent the augmentation
or extension of networks. Rather the objective is to ensure that only new
transmission and distribution assets determined (following the wide
consultation procedures) to be “justified” are to be included in the
regulated network pricing arrangements.
The Code also accommodates the development of non-regulated
networks (ie. those for which regulated prices are not recoverable). These
non-regulated networks may trade their capacity through the national
electricity market.
The current major developments in the Queensland electricity network
are the Queensland-New South Wales Interconnector (QNI) and the
Directlink project in north eastern New South Wales.
QNI, which is scheduled for completion in December 2000, is being
constructed by Powerlink Queensland (the Queensland Government
owned transmission network service provider) and Transgrid (the New
South Wales Government owned transmission network service provider).
QNI will link the existing Powerlink and Transgrid networks between
Tarong (Queensland) and Armidale (New South Wales). The capacity of
QNI is 500MW import to Queensland and 1000MW to New South
Wales. QNI will form part of the regulated network (for pricing
purposes).
The Directlink project is a distribution link in northeastern New South
Wales which is due to commence operation shortly. The capacity of
Directlink is 180 MW. Directlink is a joint venture between Northpower
(a New South Wales government owned distributor) and the private
sector. Directlink will participate in the national electricity market and
will not recover any costs through regulated prices.
(d)
Autonomy, accountability and commercial operation of public
utilities
The government owned electricity businesses have been corporatised.
The initial corporatisation took place in January 1995, with further
restructuring in December 1996 to accommodate the introduction of
competition reform. The structure is now as follows:

three generation corporations:

Stanwell Corporation (encompassing the Stanwell, Barron Gorge,
Kareeya, Rockhampton GT and Mackay GT power stations);
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
Tarong Energy (encompassing Tarong, Wivenhoe and Tarong GT
power stations);

CS Energy (encompassing Callide A & B, Swanbank A, B & C
(GT), Mica Creek and Middle Ridge GT power stations and a
share in Callide C power station);

one
transmission
corporation,
Queensland
Electricity
Transmission Corporation (“Powerlink Queensland”);

two distribution corporations:



two retail corporations:



Energex
Ergon
Energex Retail, a subsidiary of Energex;
Ergon Retail, a subsidiary of Ergon;
Queensland Power Trading Corporation (“QPTC”), which bids
the government’s generation purchase obligations under PPAs
predating the competition reforms into the wholesale electricity
pool.
Each of the above is a Government Owned Corporation (GOC) under the
Government Owned Corporations Act 1993 (GOC Act), established and
incorporated as a public company limited by shares under the
Corporations Law and declared by Regulation under the GOC Act to be a
government owned corporation.
Being a GOC, the Corporations Law applies to each of these corporations
except so far as the GOC Act otherwise provides. 15 The GOC Act
contains certain restrictions mainly in relation to shareholdings and
transfers. For example, the Act provides that:

a GOC must have only 5 shareholders16;

two of the shareholders must be voting shareholders and three
must be non-voting shareholders17;

the GOC Ministers and the Portfolio Minister of the Company
GOC are its voting shareholders18;
15
Government Owned Corporations Act, section 7(7)
16
Government Owned Corporations Act, section 76
17
Government Owned Corporations Act, section 77
18
Government Owned Corporations Act, section 79(1)
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
each non-voting shareholder must be a Minister (other than the
GOC or Portfolio Minister) nominated by the Premier19; and

the State is the owner of all shares in a GOC and a GOC’s
shareholders hold their shares on behalf of the State20.
The GOCs are subject to profit targets and performance indicators set by
the shareholding Ministers.
As the generation companies and retail companies participate in the
competitive wholesale and/or retail markets, market incentives also
encourage efficient performance.
(e)
Competitive market in generation and supply
The national electricity market which operates in Queensland, New South
Wales, Victoria, South Australia and the Australian Capital Territory is a
competitive spot market in electricity generation.
Unless specifically exempted by NEMMCO, all generators over 30MW
and connected to the grids in these jurisdictions must bid and sell their
output through the spot market. One exception is where the generator is
“embedded” and sells all of its output to the local retailer. 21 IPPs the
subject of PPAs which predate the introduction of the national electricity
market are included in the competitive arrangements. This is achieved by
QPTC being treated as a virtual generator for bidding purposes. QPTC
bids the government’s purchase obligations under those PPAs into the
spot market.
All electricity traded through the national electricity market is bought and
sold at the relevant spot price. A single spot price is determined for each
region. The calculation of spot prices is described in Question 18 below.
At the time of introduction of the competitive wholesale market in
Queensland, it was perceived that in the period prior to interconnection
with New South Wales, the tight balance between supply and demand
could lead to generators exercising market power to manipulate pool
prices. As the generators at that time were almost all government owned,
the Queensland Government has sought to address this by imposing
vesting contracts on the Queensland government owned generators and
retailers. These vesting contracts are financial one-way pool price hedges,
the prices and quantities set by the Queensland government “structured to
provide incentives for generators to bid their plant into the pool so as to
19
Government Owned Corporations Act, section 79(2)
20
Government Owned Corporations Act, section 82
21
See footnote 5 for the meaning of “embedded” generator. The local retailer is the retailer which has the retail area
(see footnote 11) in which the generator is connected.
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maintain economic dispatch and to provide appropriate pricing signals for
efficient new investment in generation”. The retailers pay a fixed option
fee to the generators. The generators make difference payments if the spot
price rises above the strike price. The vesting contracts expire in
December 2001.22
Competition in electricity retail supply is being introduced in Queensland
in stages, with the larger customers becoming eligible (or “contestable”)
to choose their retailer first.
Full retail competition in the Queensland electricity industry is currently
planned for introduction on 1 January 2001, subject to a review of the
benefits and costs.
The Queensland Government is working closely with the other NEM
jurisdictions to ensure, as far as possible, a national approach to the
delivery of full retail competition in the NEM. It is intended that a
Memorandum of Understanding will be executed between the NEM
jurisdictions and NEMMCO covering the national processes for delivery
of full retail competition and specifying what decisions are the
responsibility of jurisdictions as part of this process.
A Full Retail Competition Project has been established in Queensland to
develop a policy framework for the introduction of full retail competition
and to review the benefits and costs. As part of this policy framework, the
Steering Committee will give detailed consideration to customer
protection requirements. The Government’s current retail contestability
arrangements provide customers with a choice of becoming contestable
(ie. subject to meeting the eligibility criteria) or remaining on the safety
net franchise tariff. That is, the existing policy does not provide that
customers must become contestable after a certain time period. However,
once a customer becomes contestable they cannot access the franchise
tariff in the future.
To date, around 1,300 (of 7,300) potentially eligible customers have
become contestable. This represents around 45% of the energy
consumption by volume.
(f)
Cross-border interconnection
See section 3.1.2(c) above.
(g)
22
Conclusions
Queensland Vesting Contracts, “Submission Supporting the Application to the Australian Competition and
Consumer Commission for Authorisation under Division I of Part VII of the Trade Practices Act 1974” October
1997, section 1.4.2
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Significant power sector reforms and restructuring have been completed
in Australia, including the separation of generation and transmission
functions.
Difficulties that exist are, in general, associated with the actual delivery
of competitive outcomes from the competitive wholesale and retail
supply markets. However, to the extent that these difficulties do exist,
they are anticipated to be transitional.
For example, the use of the vesting contracts referred to above as a
mechanism to overcome the otherwise transitional market power of the
Queensland generators.
Also, the retail supply market is still in a transitional phase. In addition to
the Queensland government owned retailers, Energex Retail and Ergon
Retail, there are a large number of retailers, including interstate
government owned retailers. It is likely that the number of retailers will
decrease over time due to market forces.
3.2 Principle 2: Commercial viability of electricity utilities
(a)
Commercial wholesale tariffs
As mentioned above, unless specifically exempted by NEMMCO, all
generators over 30MW and connected to the Queensland grid (including IPPs)
must bid and sell their output through the spot market. For IPPs the subject of
PPAs that predate the introduction of the national electricity market, QPTC
bids the government’s purchase obligations under the PPA into the spot
market.
For an IPP that is the subject of a PPA, the terms of the PPA will determine the
prices received by the IPP for electricity it generates. As terms and conditions
of PPAs are confidential, details of these prices cannot be provided.
IPPs which are not the subject of a PPA will receive spot market payments
from NEMMCO for the electricity generated and actually dispatched.
Generators selling through the spot market submit offers for each half hour.
NEMMCO ranks these offers in merit order for dispatch. The half hourly spot
price is set at the marginal cost of supply, based on the offers of those
generators actually dispatched during that half hour. The generator receives a
payment for that half hour for the amount actually dispatched, based on the spot
price and adjusted for the particular loss factor applicable to the generator. The
generator receives nothing if it is not actually dispatched.
Most generators and retailers seek protection from spot price fluctuations by
entering into electricity hedge contracts. However, these are purely financial
contracts and are usually firm, operating irrespective of whether the generator
actually generates or is dispatched.
(b)
Fuel supply market
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In the context of IPPs being developed in response to market incentives, such
as is the case in Queensland at present, fuel prices are a matter of negotiation
by the IPP with its fuel supplier. Alternatively, the IPP may seek to manage fuel
pricing arrangements by incorporating the fuel source as part of its operations.
For example, the Millmerran Power Project currently under construction
southwest of Toowoomba includes the construction and operation of an
adjacent coal mine for fuel purposes.
(c)
Access issues and treatment under tax regime
There is little, if any, difference in the tax treatment of state-owned utilities,
compared with IPPs. Australia has adopted a policy of competitive neutrality.
This policy is based on the principle that Government businesses should not
enjoy any net competitive advantage simply as a result of their public sector
ownership. The principle is supported by all Governments in Australia, and a
policy and principles for achieving it are outlined in the Competition Principles
Intergovernmental Agreement, signed by the Prime Minister, all Premiers and
Chief Ministers at the April 1995 meeting of the Council of Government of
Australian Governments (COAG).
Comparability in the tax treatment of government businesses and private
business operations is a key element of competitive neutrality policy. Any
competitive advantage that a government business obtains through being
exempt from rates and taxes by virtue of its government ownership can be
neutralised through imposts that are equivalent to rates and taxes. Any entity
that falls within the coverage of the tax equivalent regime is liable for the full
range of taxes or their equivalents imposed by each sphere of Government,
Commonwealth, State and Local.
The tax equivalent regime does not involve any transfer of funds across
jurisdictional boundaries. All tax equivalent liabilities are payable to the
owner Government. The tax equivalent regime has not been designed as a
revenue-raising mechanism, since payment of tax equivalents will generally
reduce the dividend-paying capacity of these entities. Rather, the tax
equivalent regime is primarily a tool for removing competitive advantages
arising from the exempt status of Government-owned business operations.
(d)
Foreign ownership and control
Australia’s Federal Government is responsible for foreign investment policy. In
general, the policy encourages foreign investment and imposes limited
constraints on investment in new plant or alterations of ownership of existing
businesses. The policy is formulated to:

encourage foreign investment

ensure that foreign investments are consistent with Australia’s needs
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
ensure that foreign investment enhances Australia’s economic
development.
Regulatory framework
Australia’s foreign investment policy is administered by the Foreign Investment
Review Board (“FIRB”) through a notification and examination process. The
FIRB is an advisory body which examines proposals by foreign interests to
undertake direct investment in Australia and makes recommendations to the
government on whether those proposals are suitable for approval under the
government’s policy. The FIRB also advises the government on foreign
investment matters generally and provides guidance to foreign investors to
assist them in making their proposals conform with government policy.
The policy encompasses the Foreign Acquisitions and Takeovers Act 1975
(Cth), regulations made under the Act and other requirements set down by way
of Ministerial statement. Under the Act, the Government has the power to
block proposals that are determined to be contrary to the national interest. The
Act also provides legislative backing for ensuring compliance with the policy.
In August and September 1999, the Government announced a number of
changes to its foreign investment policy designed to reduce notification
obligations on business and to streamline the administration of foreign
investment policy, while continuing to ensure that foreign investment is
consistent with the interests of the Australian community.
Notification of proposals
In the majority of industry sectors, smaller proposals are exempt from
notification and larger proposals are approved unless judged contrary to the
national interest. The screening process undertaken by the Foreign Investment
Review Board (FIRB) enables comments to be obtained from relevant parties
and other Government agencies in considering whether larger or more sensitive
foreign investment proposals are contrary to the national interest.
The Government determines what is ‘contrary to the national interest’ by
having regard to the widely held community concerns of Australians.
Reflecting community concerns, specific restrictions on foreign investment are
in force in more sensitive sectors such as the media and developed residential
real estate. The screening process provides a clear and simple mechanism for
reviewing the operations of foreign investors in Australia whenever they seek
to establish or acquire new business interests or purchase additional properties.
In this way the Government is able to put pressure on foreign investors to
operate in Australia as good corporate citizens if they wish to extend their
activities in Australia.
Foreign companies acquiring an Australian business do not require government
approval for non-property investments under $50 million. Notification to the
FIRB and approval is required for foreign investments involving:
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
acquisitions of substantial interests 23 in existing Australian businesses
with total assets over $50 million or where the proposal values the
business at over $50 million;

proposals to establish new businesses involving a total investment of $10
million or more;

portfolio investments in the media of 5 per cent or more and all
non-portfolio investments irrespective of size;

takeovers of offshore companies whose Australian subsidiaries or assets
are valued at $50 million or more, or account for more than 50 per cent of
the target company's global assets;

direct investments by foreign governments or their agencies irrespective
of size;

acquisitions of interests in urban land (including interests that arise via
leases, financing and profit sharing arrangements and the acquisition of
interests in urban land corporations and trusts) that involve the:

acquisition of developed non-residential commercial real estate, where
the property is subject to heritage listing, valued at $5 million or more;

acquisition of developed non-residential commercial real estate, where
the property is not subject to heritage listing, valued at $50 million or
more;

acquisition of accommodation facilities irrespective of value;

acquisition of vacant urban real estate irrespective of value;

acquisition of residential real estate irrespective of value; or

proposals where any doubt exists as to whether they are notifiable.
(Funding arrangements that include debt instruments having quasi-equity
characteristics will be treated as direct foreign investment.)
Proposals are normally approved without examination and will not normally be
required to meet the national interest test if they involve:

the acquisition of a company or business with total assets of less than
$100 million;
23
A substantial foreign interest occurs when a single foreigner (and any associates) has 15 per cent or more
of the ownership or several foreigners (and any associates) have 40 per cent or more in aggregate of the
ownership of any corporation, business or trust.
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
the establishment of a new project or business with a total investment of
less than $100 million; or

the takeover of an offshore company with Australian subsidiaries or
assets valued at less than $100 million.
Proposals valued at $100 million or more will continue to be examined and
will normally be approved without the need to demonstrate economic benefits
or to provide for Australian equity participation, unless contrary to the national
interest. Approval will not be withheld from proposals on national interest
grounds other than in unusual circumstances affecting Australia’s vital interests
and development. In the 1997/98 year, no applications for foreign investment
were rejected.
Processing applications and approvals
Proposals submitted to the FIRB are dealt with quickly. The FIRB aims to
provide a decision within 30 days of receiving notification and proposals which
are not examinable are often dealt with even sooner.
Formal notification activates a “time clock” and if the Treasurer has not taken
action within 30 days and notified the parties within a further 10 days, the
government loses the ability to either block the proposal or impose conditions
on its approval. The government can, however, extend the 30 day period by
up to a further 90 days by issuing an interim order. As part of the proposed
changes to the foreign investment regime, these requirements are intended to be
simplified further to reduce processing time.
Approval is normally only given for a specific transaction which is expected to
be completed in a timely manner. If an approved transaction does not proceed
at that time and/or the parties enter into new agreements at a later date, or if a
transaction is not completed within 12 months, further approval must be sought
for the transaction.
(e)
Conclusions
The restructuring of the Queensland government owned entities into
commercially focussed corporations has been completed. There is fair
treatment of IPPs, regardless of ownership. Laws enable foreign ownership and
control of IPPs and there are few differences under the regulatory framework
between public and private sector participants.
However, as mentioned above, as a result of the recent Queensland Energy
Policy, there exists some uncertainty as to fuel sources for future IPPs until the
completion of the proposed gas pipelines in Queensland.
3.3 Principle 3: Regulatory framework and process for IPP approvals
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(a)
Consistent regulations and approval processes
In order to develop and operate an IPP project in Queensland, an IPP may be
required to apply for various approvals from local government, the Queensland
Government and the Federal Government.
As an illustration of the roles of different levels of government in the approvals
process, an IPP may require the following approvals:
(b)

development approvals which include planning approvals and building
permits (local government)

environmental authorities to conduct “environmentally relevant
activities” (Environmental Protection Agency (Qld))

FIRB approval (Federal Government)

water licences (Department of Natural Resources (Qld))

permits to carry out cultural heritage assessments (Environmental
Protection Agency (Qld)).
Clear, published and transparent approvals process
As a general comment, there is some consistency in the regulatory and approval
processes between the different levels of government through the Department
of State Development (DSD)’s role in facilitating and approving the
environmental] impact assessment process (see Question 27 below).
The DSD coordinates the various referral agencies which include local
government/s, State Government departments and in some cases, Environment
Australia (Federal Government department). The DSD includes the referral
agencies in the drafting of the terms of reference for the impact assessment,
coordinates their comments on the study and incorporates their views in the
recommendations that will attach to the impact assessment approval. This
provides the various levels of government with the opportunity of closely
assessing the likely environmental impacts of the IPP project and avoids
duplication of impact assessment and information required to support
applications for approvals. The involvement of the Federal Government could
be triggered in some IPP projects. The DSD already includes Environment
Australia (Federal) as a referral agency in its impact assessment process where
the Federal Government has an involvement.
The Environment Protection and Biodiversity Conservation Act 1999 (Cth) is
intended to limit the Commonwealth’s involvement in environmental matters
other than those of national significance. The Commonwealth Act provides for
accreditation of state government impact assessment processes to avoid any
need for duplicating the impact assessment process.
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The Integrated Planning Act 1997 is intended to simplify the approvals process
for approvals issued by State Government departments and local governments
(see Question 27 below). Once fully operational, it is expected that this will
simplify the approvals processes.
There are some guidelines published by agencies such as the Department of
Local Government and Planning, Environmental Protection Agency and the
Department of Natural Resources which are available in hard copy and in some
cases on the internet which may assist an IPP in its development phase. These
guidelines may explain the circumstances when a particular permit will be
required, the application process including timing and supporting information
required.
An IPP in Queensland would however generally seek the advice of consultants
and the DSD in order to identify the permits it requires and the relevant
regulatory bodies.
Incorporation of pre-approvals in tender process
Although the Queensland Government has retained the flexibility to tender for
IPPs in future, at present this option appears unlikely. Currently, IPPs in
Queensland are being developed in the context of market forces.
Presence of central coordinating agency for approvals
The purpose of the Integrated Planning Act 1997 (Qld) (IPA) is to “seek
ecological sustainability by:
 coordinating and integrating planning at the local, regional and State levels;
 managing the processes by which development occurs; and
 managing the effects of development on the environment”.
IPA is intended to be a “one stop shop” for development, that is, making it
possible for a developer to lodge applications for various Queensland and local
government approvals with the one assessment manager who will coordinate
the approvals process on the applicant’s behalf. The “one stop shop” concept is
being progressively introduced with various State legislation being reviewed
and amended to bring it into line with the IPA approvals process. To date only
a few approvals have so far been incorporated into the IPA regime, including
planning and building permits and environmental authorities. The remainder of
State legislation will be progressively reviewed and incorporated in the future.
Until such time as all approvals are included in the IPA process, there will still
be a need for a developer to apply to several different government bodies and
departments in order to secure the necessary development and operational
approvals.
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The Department of State Development (DSD) plays a coordinating role in the
approvals process for Queensland projects which are classed as “major” or
“significant” projects, by facilitating the environmental impact assessment
process. The Coordinator General (through the DSD) is required by the State
Development and Public Works Organisation Act 1971 to ensure that local
governments and State departments take proper account of the environmental
effects of developments in Queensland.
By way of example, the DSD recently coordinated the impact assessment
processes for the Millmerran and Kogan Creek IPP projects.
The DSD consults with the various referral agencies to draft the terms of
reference for the environmental impact assessment and coordinates the
responses from the public and the referral agencies. The Coordinator General
(through the DSD) assesses the impact assessment study and makes
recommendations in respect of how the IPP may develop and operate the
project.
Referral agencies will generally include the relevant local government/s,
Queensland Government departments and Environment Australia, if its
jurisdiction is triggered. Referral agencies either grant approvals or play an
advisory role.
Once impact assessment is approved, the IPP will then apply to the relevant
government bodies for the development and operational approvals it requires.
Many of these approvals will not be granted until after the environmental
impacts of the IPP have been assessed and receive Coordinator General
approval.
Although the DSD may assist an IPP in identifying the necessary approvals and
the relevant governmental contacts, it is not a central agency for granting
approvals.
(c)
Conclusions
The regulatory framework in Queensland, as in most other Australian States
and Territories, can be confusing and time consuming. To assist major projects
such as IPPs in the development phase, a central agency is needed to assist
developers in communicating with local, State and federal governments and
facilitating the approvals process.
It remains to be seen whether the “one stop shop” process under IPA will assist
a major development such as an IPP project. In many cases, the assessment
manager (ie the central coordinating body) may be a local government officer.
4.
Tender/Bid Processes and Evaluation Criteria
4.1 Principles 4, 5, 6, 7 and 8: Tender/bid processes and evaluation criteria
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(a)
Tendering approach and evaluation
Currently, IPPs in Queensland are being developed in the context of market
forces.
Although the Queensland Government has retained the flexibility to tender for
IPPs in future, at present this option appears unlikely.
However, given the recent statement by the Queensland Government in its
Energy Policy that it “will build a gas fired base load power station in
Townsville or negotiate the conversion of one or more of the existing peaking
power stations in Townsville to gas and base load operation”24, it is possible
that this may change.
If the Queensland Government were to tender for IPPs in the future, it is
expected that this would be through a comprehensive and competitive
tendering process. At this stage it is difficult to speculate on matters such as
size of bid security, pre-qualifications or other details of such a process if and
when it were to arise.
(b)
Conclusions
There appear to be no difficulties in implementing these Principles.
5.
Power Purchase Agreements (PPAs) and Associated Tariff
Structures
5.1 Principle 9: Retail tariffs
(a)
Nature and structure of retail tariffs
The Minister for Mines and Energy sets uniform (or safety-net) tariffs for
franchise customers - ie. customers who are non-contestable and receive
electricity supply at regulated rates approved by the Minister. Contestable
customers negotiate contracts, with their supplier of choice, on commercial
terms.
Electricity franchise tariffs in Queensland have been frozen since March 1994.
That is, the tariffs have not been increased in recent years to reflect the cost of
supply or to provide a certain financial return to the government owned
retailers (Energex Retail and Ergon Retail).
The Government explicitly subsidises, as Community Service Obligation
(CSO) payments, the safety net uniform tariffs which, particularly in remote
areas of the State, do not fully reflect the cost of supply. These CSOs are
determined on an annual basis as part of the State Budget.
24
Queensland Energy Policy - A Cleaner Energy Strategy, Executive Summary
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Transparency of tariffs
The retail franchise tariffs are gazetted by the Minister. From 1 July 2000, the
government owned retailers will charge the 10% Goods and Services Tax on
top of gazetted tariffs.
(b)
Conclusions
Current price setting regimes protect consumers from monopoly pricing but do
reflect economic prices. Current reforms which will lead to retail prices being
increasingly set in a commercial environment (as contestable customers
negotiate with suppliers of their choice including negotiation of prices) should
address this concern.
5.2 Principle 10: Transition to competitive markets
(a)
PPA tariff structures that promote competition
No new PPAs have been entered into since the introduction of the National
Electricity Market.
Existing PPAs have been accommodated into the competitive wholesale market by
the following mechanisms:

QPTC bids the generation from the relevant IPP into the spot market and
receives payment based on the spot price for electricity dispatched from the
IPP. QPTC is responsible for fulfilling the Government’s purchase
obligations under the PPA to the IPP.

The parties are attempting to renegotiate the terms of the PPAs to bring them
more in line with the national market arrangements. In the meantime, the
National Electricity Code contains provision that where there would
otherwise be inconsistency between the PPA and the Code, the PPA will
prevail.
The mechanisms used in Queensland and the other national market States
show that PPAs do not necessarily prevent the output of an IPP being bid
through a competitive market. Nevertheless, it is necessary to ensure that, by
ringfencing or otherwise, the body bidding the Government’s purchase
obligations does not have a level of capacity that would enable it to fix market
prices and therefore limit competition.
(b)
Conclusions
PPAs signed under the former industry structure limit the impact of
competitive reforms. However, the Queensland Government has taken steps to
overcome this problem by the mechanisms outlined above.
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5.3 Principle 11: Allocation of risks
(a)
Allocation of risks under PPAs
By and large, the terms of concluded PPAs are confidential. The State
Agreement for the Gladstone Power Station is publicly available as it forms a
schedule to the Gladstone Power Station Agreement Act 1993. The State
Agreement, which is not a PPA itself, is an agreement pursuant to which the
State provided certain undertakings and assurances relating to the acquisition
and future operation of the power station by the private sector participants in
the Gladstone joint venture. The PPAs are referred to in the State Agreement
(an Interconnection and Power Pooling Agreement and Capacity Purchase
Agreements), but the terms of these agreements are confidential.
In the event of any future PPAs, the allocation of risks is likely to depend on
the need for the Government to ensure the development of a particular IPP. It is
extremely unlikely that any such PPA would be supported by a State
Agreement In the context of the competitive market which now exists in
Queensland and for the IPPs being developed without the backing of PPAs
(such as Millmerran), this effectively moves all risks to the proponent of the
IPP.
In the negotiation of a PPA, allocation of risks between the proponent and the
government is likely to be driven by their relative bargaining positions not only
the ability of the parties to manage risk and the ability of markets to provide
cover. For example, if the development of the IPP is vital to the government
and the proponent has other options, the PPA will be favourable to the
proponent.
(b)
Conclusions
Methods for the allocation of risk under former and existing PPAs are largely
confidential. However, as the market becomes more competitive and PPAs are
no longer negotiated, the allocation of risks to IPPs should become more
appropriate and transparent. The existence of mature insurance markets in
Australia makes available the insurance products for the proper management of
risk by IPPs.
The government will continue to assume responsibility for risks to the overall
system, including the security of supply.
6.
Financing and its Implications
6.1
Principle 12: Regulatory, taxation and foreign exchange regimes
(a)
Transparency of taxation regime
The Australian taxation regime is generally developed and provides a
consistent and transparent environment to investors.
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Goods and Services Tax
A key reform to the Australian taxation system is the introduction of a
broad-based consumption tax (GST), effective from 1 July 2000. GST is a tax
imposed on the supply of goods and services and is generally applied at each
stage of the production/distribution chain. Businesses incur liability to
account for GST at either the time of the issue of an invoice or the receipt of
payment, which ever is earlier.
The GST rate is 10% and is applicable to all taxable supplies made after 1 July
2000. Under the reforms, the GST will replace many existing indirect taxes.
In addition, financial institutions duty, debits tax and many types of State
government stamp duty are due to be abolished.
Company Tax
Both foreign and local companies are taxed at a flat rate of 36% on gross
income, less any allowable deductions.
Thin capitalisation
Thin capitalisation provisions were introduced to prevent multinational groups
from allocating excessive debt to their Australian operations. The provisions
operate where interest is payable by a foreign company to a “foreign
controller”25 or its associates.
Interest payable to the foreign controller or associates will not be deductible to
the extent that it relates to “foreign debt”26 in excess of the prescribed ratio to
“foreign capital”27. The prescribed ratio is 2:1.
Transfer pricing
Provisions in the Income Tax Assessment Act deal with arrangements by which
profits are shifted out of Australia. The Commissioner of Taxation may
impose arms-length prices in relation to:

supply or acquisition of property or services between related parties
under an “international agreement”

internal dealings of an international organisation (such as between
international head office and an Australian subsidiary).
25
A foreign controller is defined as a foreign owned company with a 15% or greater interest in the Australian
company.
26
Foreign debt is any loan where interest may be payable to the “foreign controller” or its associates.
27
Foreign equity is broadly equivalent to the foreign controller’s net equity in the Australian company.
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Any management charges or supplies of services by foreign investors to related
Australian companies must be commercially justifiable and at approximately
arms-length prices.
Other matters
It should also be noted that, at present, there is no framework BOT or BOO law
covering issues relating to investment protection, long-term tax and foreign
exchange regime, co-ordinated approvals process, etc.
(b)
Conversion of local currency to foreign currency
The privatisation of the electricity sector in the States has been accompanied by
relaxation of foreign exchange controls and other steps designed to encourage
foreign direct investment. The Australian currency is fully internationalised.
(c)
Availability and transferability of foreign exchange
The responsibility for foreign exchange control rests with the Reserve Bank
under the Banking (Foreign Exchange) Regulations. Almost all restrictions on
foreign currency transactions have been removed since the floating of the
Australian dollar.
The flow of currency into and out of Australia is monitored through a reporting
system administered under the Financial Transaction Reports Act 1988 (Cth).
This Act requires designated cash dealers to report significant transactions to an
agency known as AUSTRAC (Australian Transaction Reports and Analysis
Centre).
Protection against foreign exchange rate changes
There is no protection against exchange rate changes.
(d)
Financial information on power purchasers and other parties
The rules governing disclosure of financial information about GOCs are
prescribed in the GOC Act and the Financial Administration and Audit Act.
These rules include requiring the Annual Reports of a GOC to contain
particulars about the GOC’s financial position, profits and losses, whether they
can pay their debts and when these debts fall due.28 Whilst the annual reports
are publicly available, information of a commercially sensitive matter
(including financial information) may be deleted from the reports that are made
public. In addition, the audited annual financial statements of a GOC must be
published in a way the appropriate Minister directs.29
28
Government Owned Corporations Act, section 131
29
Financial Administration & Audit Act, section 46F
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Participants in the national electricity market must satisfy the prudential
requirements specified in the National Electricity Code 30 . In particular,
purchasers of electricity through the spot market are required to lodge
acceptable credit support with NEMMCO in support of their payment
obligations. Participants do not have access to financial information relating to
other participants under the National Electricity Code.
The regulator may require holders of authorities under the Electricity Act to
provide various types of information, including financial information, from
time to time. However, commercially sensitive information so provided would
not then become publicly available.
To the extent that generators and retailers negotiate financial hedge agreements,
disclosure of financial information is a matter of negotiation between the
parties. However, in general, to enter into electricity hedge contracts, it is
necessary for a person to be registered by ASIC pursuant to the Corporations
(Exempt Futures Market - National Wholesale Electricity) Declaration 1999.
To be so registered, ASIC must be satisfied that the person has "sufficient
financial resources to meet, in a timely way, all financial obligations arising,
in reasonably foreseeable circumstances" under its electricity hedge contracts.
After registration, ASIC can remove the registration if it is no longer satisfied
of this matter. Each registered person must lodge periodic reports with ASIC.
Again, commercially sensitive information so provided would not then become
publicly available.
(e)
Conclusions
Clear regulatory, taxation and foreign exchange regimes that comply with this
principle already exist in Australia. There is thus no need for further action in
this area.
6.2
Principle 13: Security over project assets
(a)
Legal framework for creating security over project assets
There is a legal framework in Australia for creating security over project assets
in favour of lenders. The common law recognises the creation of security over
future assets. Accordingly, security is taken over project assets in the form of
fixed and floating charges. These also include step-in rights and rights to
assign as security.
In terms of the generating “licence” in Queensland, under the Electricity Act a
“generation authority” is not transferable and therefore security cannot be taken
over the generation authority itself. However, other options are available to
overcome this limitation and these have been accepted by financiers in
Queensland IPP financing.
30
National Electricity Code, clause 3.3
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(b)
Conclusions
Although generation authorities are not transferable under the Electricity Act,
this has not prevented the creation of acceptable security over IPP project
assets. It is considered that there are no material difficulties in achieving these
objectives. Thus, no further action is recommended for this area.
6.3
Principle 14: Bankability of IPPs
(a)
Project structure providing determined income stream
The terms of concluded PPAs are confidential. Following the introduction of
the national electricity market, it is now common for generators (and retailers)
to enter into electricity hedge contracts as part of their risk management
regime, to provide some certainty as to the income stream to be generated by
the project. These hedge contracts are financial contracts for differences and
operate outside of the national electricity market. Although the terms of
individual hedges are confidential and are subject to negotiation between the
parties, in general the hedges tend to be:
 based on standard ISDA documentation; and
 firm (in that they are not dependent on whether the power station is actually
generating and dispatching power).
(b)
Creditworthiness and track record of all parties
As mentioned previously, at present there is a large number of retailers (ie.
power purchasers) in the national electricity market and it is anticipated that,
over time, market forces will lead to a decrease in this number.
Under the national market arrangements, power purchasers have an obligation
to NEMMCO, not individual generators, to pay for electricity. As mentioned
above, the purchasers must satisfy the prudential requirements, and provide
credit support to NEMMCO in support of these obligations.
Generators are entitled to payment from NEMMCO for electricity supplied
only to the extent that NEMMCO recovers payments from the power
purchasers (including by recourse to credit support). NEMMCO itself is a
company limited by guarantee. The members of NEMMCO are the
governments participating in the national electricity market, of which
Queensland is one. The guarantees provided by the member jurisdictions are
subject to monetary limitations. While these are more than nominal amounts,
they are not considerable. Accordingly, support for the generators’ entitlements
to receive payments from NEMMCO is seen as coming from the provision of
credit support by the purchasers under the National Electricity Code rather than
from the member jurisdictions’ guarantees.
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As mentioned above, to register a person under the Corporations (Exempt
Futures Market - National Wholesale Electricity) Declaration 1999, ASIC must
be satisfied that the person has "sufficient financial resources to meet, in a
timely way, all financial obligations arising, in reasonably foreseeable
circumstances" under its electricity hedge contracts. ASIC has, to date,
satisfied itself of this by requiring an applicant for registration to show that it
has tangible assets of more than A$10 million. However, this is not a
mandatory threshold and it may be possible to satisfy the test for registration in
other ways and therefore, should not be assumed that all registered persons
have tangible assets of more than A$10 million.
It is common under electricity hedge agreements for the parties to include
credit support arrangements depending on the creditworthiness of the parties.
This is a matter of negotiation between the parties.
Government guarantee of PPA obligations
Under the State Agreement for the Gladstone Power Station, the State has, in
broad terms, an obligation to procure a guarantee from an entity having a credit
rating of “A” level credit rating (Standard & Poor’s or equivalent) or above if
the government owned purchaser under the PPAs falls below such level.
The guarantee arrangements under the other concluded PPAs are confidential.
Ensuring local companies have proven track record
As company GOCs, Queensland government owned electricity entities are
required to apply the Queensland Government Purchasing Policy. These
guidelines are designed to ensure that local companies are not excluded from
the opportunity to supplying goods and services to Queensland Government
owned bodies and departments, rather than requiring goods and services to be
sourced locally.
Otherwise, there is no requirement to select local companies to participate in
contracts for the supply of goods or services to IPPs.
The criteria which must be satisfied for the grant of a generation authority
under the Electricity Act includes that the applicant must be a suitable person to
be a generation entity and the owner of the generating plant (if not the
applicant) must also be a suitable person to be the owner. In deciding as to a
person’s “suitability”, the regulator may consider:
“(a)
the person’s previous commercial and other dealings and the standard of
honesty and integrity shown in the dealings; and
(b)
any failure by the person to perform commercial and statutory
obligations and the reasons for the failure; and
(c)
the person’s criminal history; and
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(d)
if the person is a corporation - the matters mentioned in paragraphs (a) (c) for the persons who are shareholders, directors or holders of other
interests in the corporation;
(e)
for the applicant - the applicant’s competence to be the operator;”31
Similar criteria apply to an application for a retail authority. These criteria
apply to local and international persons.
(c)
Support from international lending agencies
As Australia is an OECD country, projects do not attract support from export
credit agencies or other multilateral agencies.
(d)
Commercial and political risk insurance
The commercial insurance market in Australia is large and such insurance is
widely available. All types of insurance generally provided for infrastructure
projects are available to an IPP project, the principle ones being, constructions
all risk, business interruption and third party liability.
A bulk of the insurance is done onshore without reinsurance.
insurers are “real” insurers and take risk on their own books.
(e)
Domestic
Conclusions
As mentioned previously, at present there is a large number of retailers (ie,
power purchasers) in the national electricity market. The difficulty for the
implementation of this principle is that it is difficult to minimise the exposure
of generators, including IPPs, to fluctuations in the creditworthiness of such a
large number of individual retailers.
However, there are two factors that help to ovecome this problem.
First, it is anticipated that, over time, market forces and consolidations will
result in a decline in the number of retailers. Secondly, the features of the
competitive market operating in Queensland are designed such that:

31
sale of wholesale electricity is through the national electricity market,
rather than pursuant to individual PPAs, supported by NEMMCO
obtaining credit support for customers’ wholesale electricity purchases.
Under the national electricity market, generators look to NEMMCO for
payment for physical electricity sales, rather than to individual
purchasers. The credit support provided to NEMMCO by purchasers for
electricity purchases is seen as providing generators with an appropriate
level of assurance of payment. Apart from these credit support
Electricity Act, section 180(3)
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arrangements, the financial resources of NEMMCO are somewhat
limited.

6.4
ASIC’s test of sufficiency of financial resources provides some
framework for creditworthiness of participants in the electricity hedging
market. However, this does not replace the necessity for counterparties
to consider whether to seek credit support when negotiating individual
hedge contracts.
Principle 15: Development of domestic capital
(a)
IPP financing techniques
Gladstone Power Station and Millmerran Power have both been financed by
non-recourse project financing. Gladstone Power Station, negotiated and
constructed prior to the introduction of the national electricity market, is the
subject of long term PPAs and a State Agreement, supported by legislation.
Millmerran Power is currently under construction and achieved financial close
in the competitive market environment and without any PPA. CEPA (Kogan
Creek) is seeking financing on a similar basis.
(b)
Policies to encourage the development of domestic capital markets
Domestic capital markets in Australia is fairly well developed and have good
capacity. A range of domestic capital funds are available for equity
investment in electricity projects. The principal source of funding is provided
by major superannuation funds such as AMP, National Mutual. The
Macquarie Bank also makes equity investments in electricity projects.
The domestic markets have been used extensively for IPP financing. These
have been a mixture of both debt and equity financing. Debt financing has been
provided by a mixture of both offshore and domestic banks. There are strong
domestic banks, the principal ones being, Commonwealth Bank of Australia,
Westpac, National Australia Bank and Australia and New Zealand Banking
Corporation.
Recent federal capital gains tax reform and other tax initiatives will benefit the
venture capital industry. The decision to exempt offshore pension funds (with
assets of less than $50 million) from capital gains tax on venture capital
projects would make it attractive for many offshore venture capital investors
who were discouraged from investing under the former regime. Under the new
regime pension funds from the United States, Britain, Japan, Germany, France
and Canada will no longer be subject to a 36% Capital Gains Tax, as that has
now been reduced to zero.
(c)
Conclusions
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Australia has a well developed domestic capital market, with a diverse source
of funding for IPP projects. Consequently, no difficulties with implementing
this principle have been identified.
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