Caught between two regulators: who pays for networks’ stranded labour costs?


Applications by Ausgrid and Essential Energy to the Australian Competition Tribunal (pending)

Essential Energy v CEEEIPASU [2015] FWC 6931

The Australian Energy Regulator says that networks’ regulated revenue should not cover inefficient EBA redundancy policies; but the Fair Work Commission rules that the networks must continue to apply those policies. Who will bear the cost: the networks, or consumers?

In its 2014-2019 revenue determination for Ausgrid and Essential Energy, the Australian Energy Regulator (AER) imposed significant reductions from the revenue allowance for operating expenses that the networks had received in the previous 2009-2014 period. One response by Ausgrid and Essential has been to reduce their workforces, in order to lower their opex requirements. But their ability to downsize is hampered by redundancy policies under their enterprise bargaining agreements (EBA), which do not allow the networks to make forced redundancies.

The AER’s regulatory task is to give a revenue allowance that reasonably reflects the efficient costs that a prudent network operator would require to operate its network and to comply with all applicable regulatory obligations or requirements. “Regulatory obligations or requirements” are defined to include an Act, or any instrument made under or for the purposes of an Act, that materially affects the provision of electricity network services.

Ausgrid and Essential submitted to the AER that, insofar as they are unable to make forced redundancies of their EBA workforce, the costs of retaining those employees are the costs of complying with their regulatory obligations – namely, the EBAs, or alternatively the Fair Work Act 2009 – and should therefore be covered by their regulated revenue. The AER’s response was that the networks’ inability to make forced redundancies was the product of their past management decisions to enter into EBAs on those terms, and its hiring of permanent employees under EBA conditions, rather than contractors, for their large but short-term capex programs during 2009-2014: thus, the costs reflect inefficient past management decisions, rather than truly unavoidable compliance costs that are wholly outside the networks’ control. The AER also referred to public acknowledgements by the CEO of Networks NSW that the existing EBA arrangements were inefficient.

Those were the parameters of the debate on this issue before the Australian Competition Tribunal in September/October this year. The Tribunal has yet to give its decision on the review applications brought by Ausgrid and Essential (and other NSW/ACT electricity and gas networks: Endeavour Energy, ActewAGL and Jemena Gas Networks) and by the Public Interest Advocacy Centre on behalf of consumer interests. The Tribunal’s decision is expected imminently, and will be influential in relation to future Tribunal reviews and AER revenue determinations for network operators in other jurisdictions.

If only matters were that straightforward…

On the last morning of the Tribunal hearing, the Sydney Morning Herald reported that Ausgrid and Essential Energy had applied to the Fair Work Commission to determine whether they can implement forced redundancies under their existing EBAs. PIAC (for whom the author acted) sought to put that information before the Tribunal, but was met by an evidential objection, which the Tribunal upheld: subject to very limited exceptions, the Tribunal may only consider material that was before the AER when it made its revenue determination. If the networks’ applications to the FWC were accepted, then they would avoid the ongoing EBA labour costs for which there were claiming a revenue allowance. The making of that application to the FWC by Ausgrid and Essential would be consistent with the efficiency-promoting objective of the National Electricity Law; but it would be inconsistent with that regime for the networks to earn that revenue allowance from electricity consumers if the networks were in fact able to implement forced redundancies.

The networks’ argument to the FWC turned on whether they were permitted to alter their redundancy policy after the EBA’s nominal expiry date had passed, but while the EBA still remained in force. On 2 November 2015, the Fair Work Commission determined that Ausgrid and Essential remain bound by their redundancy policies, and are therefore prohibited from making the forced redundancies.

The Australian Financial Review editorialised that:

a farcical bureaucratic turf war has broken out in NSW between the AER and the FWC. … Thus goes the Australian complacency: a state owned electricity company that had to be regulated to stop featherbedding, [and] a workplace regulator that said it has to keep featherbedding.

In the meantime, it remains for the Competition Tribunal to decide whether an EBA obligation is, or is not, a “regulatory obligation or requirement” within the meaning of the National Electricity Law, and whether Ausgrid and Essential should be allowed to recover their EBA costs. And because of the evidential constraints that apply, the Competition Tribunal is required to make that decision without regard to the fact of Ausgrid and Essential having applied to the FWC, or the outcome of those applications.


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