AGL's Default Rolr Cost Recovery Schemes and Distributor Payment Determination - August 2014

AGL's Default RoLR cost recovery schemes and Distributor payment determination

Determinations

22August 2014

© Commonwealth of Australia 2014

This work is copyright. Apart from any use permitted by the Copyright Act 1968, no part may be reproduced without permission of the Australian Competition and Consumer Commission. Requests and inquiries concerning reproduction and rights should be addressed to the Director Publishing, Australian Competition and Consumer Commission, GPO Box 3131, Canberra ACT 2601.

AER reference: D14/115793

Contents

Contents

Background

1AGL's default RoLR cost recovery application

2Consultation

3The AER's assessment of the application

3.1Costs recoverable

3.2Method of recovery over three distributors

4AGL's RoLR cost recovery scheme determination

5RoLR cost recovery scheme distributor payment determination

Background

The National Energy Retail Law (the Retail Law) makes provision for a national Retailer of Last Resort (RoLR) scheme to provide common arrangements across participating jurisdictions in case of retailer failure. Under these scheme, the AER is responsible for the registration and appointment of RoLRs and the determination of RoLR cost recovery schemes to allow for the recovery of RoLR scheme costs.

The AER must ensure that a default RoLR is registered to each connection point in the case of electricity, and each distribution system in the case of gas. If a RoLR event occurs, and the AER has not appointed a designated RoLR prior to the event occurring, the default RoLR is taken to be appointed as the designated RoLR in respect of that event.[1]

A registered RoLR (including but not limited to a designated RoLR) cannot recover costs incurred in relation to the RoLR scheme except in accordance with a RoLR cost recovery scheme determined under Division 9 of Part 6 of the Retail Law.[2]

AGL[3] is the default RoLR for a number of jurisdictions for both electricity and gas. On 8 October 2013, AGL submitted a default RoLR cost recovery application to the AER. We requested additional information from AGL following a meeting on 18 November 2013, which was provided on 8 April 2014.We then consulted on this application with submissions invited between 1 May and 30 May 2014.

The AER must now determine a RoLR cost recovery scheme for AGL.[4]Our determination of AGL's RoLR cost recovery schemeis set out in chapter 4.

As part of this determination the AER must also make a RoLR cost recovery scheme distributor payment determination which sets out which distributors are to make payments towards the costs of the scheme.[5] Distributors are required to make payments to a RoLR in accordance with their liability under this determination.[6] Our determination is set out in chapter 5.

Our assessment of AGL's application has been conducted in accordance with Division 9 of Part 6 of the Retail Law. We have also considered the AER's RoLR guidelines (the Guidelines) and the AER's statement of approach (the Statement of Approach) where relevant.[7]

1AGL's default RoLR cost recovery application

AGL's default RoLR cost recovery applicationsets out costs it claims it has incurred in preparing for RoLR events due to its responsibilities as a default RoLR for the following jurisdictions and fuel types:

• AGL South Australia Pty Ltd: the default RoLR for electricity in South Australia for customers connected to the electricity distribution system of SA Power Networks
• AGL South Australia Pty Ltd: the default RoLR for gas in South Australia for customers connected to the gas distribution system of Envestra
• AGL Retail Energy Ltd: the default RoLR for gas in New South Wales for customers connected to the gas distribution system of Jemena Gas Networks (NSW) Ltd
• AGL Sales Pty Ltd: the default RoLR for gas in New South Wales for customers connected to the gas distribution network of Allgas Energy Pty Ltd

AGL considers it has incurred $87605.45 of costs in preparing for RoLR events. AGL is proposing to meet $37836 of these costs. AGL is seeking to recover the remaining $49769.45 through a RoLR cost recovery scheme distributor payment determination.

AGL proposes to split the cost equally between the four affected networks because the costs are all fixed and independent of customer volumes. This will equate to a cost of $12442.35 for each affected network.

A breakdown of AGL's costs is provided in appendix A.

2Consultation

We were required to publish on our website a notice of the application which invites submissions within a specified period of at least 20 business days.[8] The notice and a public version of AGL's application were published on our website on 1 May 2014. Submissions were invited by 30 May 2014. We were also specifically required to consult with the distributors affected by AGL's application in respect of the RoLR cost recovery scheme distributor payment determination.[9]

We received submissions fromJemena Gas Networks (NSW) Ltd (Jemena) and Allgas Energy Pty Ltd (Allgas) raising the following issues:

• Allgas submittedcustomers in its network are not covered by the Retail Law framework
• Jemena considered that there may be other equally valid methods for splitting costs between distributors other than the AGL proposal.

Additionally, the AER consulted individually with AEMO and AGL on AGL's RoLR cost recovery application regarding the nature of T900 reporting costs.

3The AER's assessment of the application

Division 9 of Part 6 of the Retail Law sets out how the AER must assess RoLR cost recovery applications. The AER has previously published the RoLR Guidelines, and the Statement of Approach. We have considered these two documents where relevant.

Section 166(2) of the Retail Law requires cost recovery applications to be in the form and contain the information specified in the Guidelines. Chapter 5 of the Guidelines sets out the information to be included in a RoLR cost recovery application, and the form of the application.

We consider AGL's application satisfies the requirements set out in the Guidelines.

Section 166(7) of the Retail Law sets out the principles that the AER must be guided by when making a decision on a cost recovery application. It provides:

The AER must, when making its decision on the application, be guided by the following principles:

(a) the registered RoLR should be provided with a reasonable opportunity to recover the reasonable costs that it incurs with respect to the RoLR scheme;

(b) the recovery of costs should allow for a return commensurate with the regulatory and commercial risk with respect to the RoLR scheme;

(c) the registered RoLR will itself bear some of the costs, in proportion to its customer base.

Note - the AER must also have regard to the national energy retail objective

The national energy retail objective is set out in section 13 of the Retail Law, and states:

The objective of this Law is to promote efficient investment in, and efficient operation and use of, energy services for the long term interests of consumers of energy with respect to price, quality, safety, reliability and security of supply of energy.

The sections below illustrate how we have been guided by the principles set out in section 166(7) of the Retail Law, and have had regard to the national energy retail objective, when making our decision on AGL's cost recovery application.

3.1Costs recoverable

3.1.1Reporting requirement (T900 costs)

AGL claims as part of its total costs, T900 costs. We understand from AEMO, that T900is a reporting requirement on all retailers to supply AEMO with monthly updated customer and site information to ensure there is up-to-date information to facilitate efficient customer transfers if there is a RoLR event. This requirement is established through AEMO Retail Market procedures.

We consider T900 reporting costs are not reasonable costs to claim in the context of the default RoLR arrangements.[10] While these costs have some relationship to RoLR scheme costs, they are costs imposed on all retailers, and are not Default RoLR specific. The AER is empowered under the Retail Law to limit costs recoverable and accordingly we are disallowing the inclusion of these reporting costs.[11]

We consider not allowing AGL to recover T900 costs is a decision which best meets theNational Energy Retail Objective.[12]If the AER allows T900 costs this will result in the RoLR scheme creating windfall gains for AGL. We consider this would be an inefficient outcome. It would not be in the long term interests of consumers with respect to price. It would result in AGL being able to recover a cost which other competing retailers could not, creating an uneven playing field that would not encourage efficient investment in energy services.

3.1.2Staffing costs

We have approved the recovery of internal staffing costs associated with default RoLR preparations. We have permitted these costs to be recovered in the context of default RoLR preparations as these costs were minimal, and would not have been incurred in the absence of the obligation to act as a default RoLR.

Where staff labour costs are incurred on or after a RoLR event, it may not always be appropriate to permit the recovery of those costs through a RoLR cost recovery scheme. For example, it may be that the standing offer tariffs charged by RoLRs to customers of the failed retailer are an adequate mechanism for recovery of staffing costs.

The AER will consider staff labour costs forming part of a RoLR cost recovery scheme application on a case by case basis.

3.2Method of recovery over three distributors

Allgas is not part of the Retail Law RoLR scheme and therefore the AER agrees with the Allgas submission that its customers should not bear costs. However, the AER also considers the exclusion of the 1,200 Allgas customers from the RoLR costs claimable by AGL will not materially alter the amount of RoLR costs required to be recovered for the other three areas where AGL is the Default RoLR.

Noting the above, the AER consulted with all affected distributors (not Allgas) and each distributor was agreeable to costs being distributed on a per meter basis or per customer basis. Accordingly, distributors supplied total customer meter numbers as at 30 June 2014. The AER has used these numbers as a basis to allocate liability pro-rata evenly across all customers in chapter 5.

4AGL's RoLR cost recovery scheme determination

AGL claimed it has incurred total RoLR costs of $87, 605.45. In accordance with section 166(7)(c) of the Retail Law it proposed to bear some costs. Accordingly, it claimed $49,769.45. This equates to it claiming for recovery 56.8% of proposedRoLR costs.

The AER considers the inclusion of T900 reporting costs of $35,104is not appropriate for the reasons noted above.Otherwise, we consider the other proposed RoLR costs of $52,501.45 are recoverable.

The AER is reducing the new amount of recoverable RoLR costs in the same proportion as proposed by AGL for the original amount of recoverable costs. It is reasonable, given the small amounts involved,to apply the same percentage factor as in its application to the lower recoverable amount of $52,501.45.

As a result, the AER approves costs of $29,287.

5RoLR cost recovery scheme distributor payment determination

The total cost approved is $ 29,287.

This amount is to be pro-rated between the three distribution businesses noted below in accordance with meter numbers provided as at 30 June 2014. This will result in an approximately equal cost liability for customers.

The distributors below are to pay AGL the following amounts:

• Jemena Gas - $14,586
• Envestra (SA) - $5,094
• SA Power Networks - $10,147

This amount is to be paid by distributors to an entity nominated by AGL in full within 30 days of the date of the RoLR cost recovery scheme distributor payment determination.

Appendix A: AGL's cost breakdown proposal

Cost type / Description / Cost incurred ($) / Supporting documentation
Implementation/Set up costs, & Labour / Development of RoLR operational plan / $7,369.89 / Business analyst working time spent 18.42 days @ $400 per day
Labour / Preparation for SA gas RoLR testing / $6,000 / Regulatory manager, 10 days @ $600 per day:

• Participation in industry forums
• Setting up environment connectivity
• Conducting test cases and managing defects

System enhancement cost / Automation tools for creation of customer, site and contract data / $25,000 (cost met by AGL)
System enhancement cost / System updates to accommodate T900 automation / $35,104
Communications / Development of copy for two required RoLR letters:
(a) For contact customers of the failed retailer advising them of the RoLR event, their rights, and their rates, and;
(b) For AGL customers with a pending transfer to the failed retailer / $1,575 (cost met by AGL) / Blue Group Invoice:

• Development of copy
• Copywriting
• Project management

Communications / Cost of having RoLR letters set up in readiness at mail house, to meet 25 business-day requirements / $500 / Mail house set up:

• Mail house printing and lodgement
• Letterhead

Labour / Work undertaken to assemble incurred and estimated costs for RoLR cost recovery / $795.56 / Business analyst 1.99 days @ $400 per day
Labour (Vendor) / APA Bilateral testing / $11,261 (cost met by AGL)
Total / $87, 605.45
Proportion of costs AGL proposes to be met by it / $37,836
Subject of this cost recovery application
(AER note: equates to 56.8% of proposed RoLR costs) / $49,769.45

[1] Section 132 (1) of the Retail Law

[2] Section 166 of the Retail Law

[3]In this document, 'AGL' refers only to AGL South Australia Pty Ltd, AGL Retail Energy Limited and AGL Sales Pty Limited

[4] Section 166(1) of the Retail Law

[5] Section 167(1) of the Retail Law

[6] Section 167(3) of the Retail Law

[7]

[8] Section 166 (5) of the Retail Law

[9] Section 167 (1) of the Retail Law

[10] Section 166(7) of the Retail Law

[11] Section 166(8) of the Retail Law

[12] Section 205 of the NERL requires the AER in performing or exercising a regulatory function or power, to perform or exercise

that function or power in a manner that will or is likely to contribute to the achievement of the National Energy Retail

Objective