A low risk of high cost

This submission addresses the Australian Energy Market Commission’s (AEMC) options paper National Electricity Amendment (Retailer-Distributor Credit Support Requirements) Rule 2015 and National Gas Amendment (Retailer-Distributor Credit Support Requirements) Rule 2015 (the options paper). Due to the complexity of the issue, the AEMC developed an options paper to analyse four options with sub-options to improve risk management before and after a default. The four main options were to keep the existing arrangements, to strengthen the existing arrangements, to establish a retailer default pool, and to establish a liquidity support scheme. In addition to the options, the options paper outlines five regulatory principles to guide the selection of the final option and rule change. In determining our preferred option, PIAC assessed the ongoing costs and post-default costs for each option, as well as the overall risk of a default in the energy sector. PIAC has determined that option 2.1 is the preferred option because it has the lowest ongoing costs and an improved cost recovery process for distributors. While this option does have significant post-default costs, PIAC understands that the actual risk of a retailer defaulting is low and the impacts of a small retailer default are immaterial. While the impact of a large retailer would be significant, it is highly unlikely that an established large retailer will default. In addition, it would be unlikely that a large retailer would default without any warning signs that would alert the industry of the need for intervention.