Fencing Wire and Mirrors: the World of the National Energy System

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The National
Electricity Grid and Market: The Basics

You go home in the evening, in Rockhampton, say, and turn on the light. There is a tiny flicker in Whyalla and Hobart and Narranderra
and everywhere else around the national power grid – the system of energy
suppliers and wires and pipelines and switches running pretty much across the

How big is the national grid?
Since the late 1990s the grid covers everyone from far North Queensland
down through the eastern states to Tasmania,
and across to South Australia, well over four thousand kilometres. Western Australia
and the Northern Territory,
so far, have independent systems because they are a bit too far away.

What’s in it?
Over thirty major power generating companies, with over a hundred power
plants, mainly coal-fired or gas-fired turbines. Twelve companies run networks of transmission
lines on the steel towers you see striding across the country. Sixteen local distributors and retailers use
the poles and wires in our streets to transfer it from the big towers into our
houses, and then send us the bill for it all.

How is the whole thing managed?
With difficulty, the whole system is kept in balance by the central
operator, NEMMCO (the National Electricity Market Management Company). Every
disturbance – whether it is you with your little switch, a storm in Queensland, a fire in Victoria or a run on air-conditioners on a
hot summer afternoon – is absorbed. The
signaling system that NEMMCO uses to keep everything in sync is called the
National Electricity Market, the NEM. Generators – the people who make and sell the
electricity – and retailers – the people who buy it from them and sell it to
consumers – tell NEMMCO what prices they will sell and buy for, every minute of
the day, using an auction system, rather like the Stock Exchange. It has to be in balance every second because
electricity can’t be stored in grids. You can’t put some aside for a rainy day when you have more than you need and use it later when you have too little.

That’s it, briefly. A more precise description would take several
hundred pages and lots of math, as the Americans say.

Why a
National System?

Until the
1990s, Australia
had a series of separate regional power grids.
We now have a system linked almost across the nation – a system which,
when well managed, is cheaper and more reliable. In the late 1980s, governments finally came
to see that the existing State monopoly power commissions were amazingly
inefficient and hungry for great gobs of capital for new power stations and
coal mines. The greater reliability of a connected system is just as important as the cost savings. With a national grid and a national market,
it is possible to provide softer cushions against natural or man-made
catastrophes: a spiraling cyclone, a stinking hot afternoon (one of the worst
risks), the collapse of a transmission
tower, or, to take a gloomy view, a terrorist attack.

So it is
hardly surprising that State governments should have looked for a new way to
keep the lights on. Of course, when
talking to their voters back home, they still kept assuring their constituents
– and still do – that they were looking
after their power, that they were
making sure that their State’s power
supply is in good shape. The fact is that now all of the connected States rely
upon each other and NEMMCO, to keep the whole show firing.

As a
result, much the same amount of base generating capacity can meet our needs now as twenty
years ago. And, when precarious episodes
have arisen, the wizards at NEMMCO managed to keep the system up, and you, good
citizens, probably neither heard nor worried about it.

The Fencing
Wire and Pliers

In the early
1990s, with a national system now technologically
possible, economically cheaper and socially more secure, governments faced a
constitutional question: is it legally possible? A national electricity system
wasn’t an option considered by the writers of the Constitution. There were no Commonwealth powers allocated for
this, so what was to be done? Improvise,
came the call. Out came the great tools of Australian innovation – fencing wire
and pliers.

it was part of ‘Creative Federalism’. This was the name given, you will recall,
by Paul Keating, and taken up with gusto by John Howard and now by Kevin Rudd,
to a new method of Commonwealth/State relations whereby the legal and
regulatory systems of our engagingly diverse communities would be brought into
greater ‘harmony’. The very first cab
off the rank was the National Electricity Market, the NEM. It had pride of
place in the first couple of meetings of COAG and has hardly been heard of since.

There were,
however, problems in getting it all together. One law covering all that was
needed couldn’t be passed by the Commonwealth, because the Constitution didn’t
allow it. And at any rate the States
wouldn’t accept it. They were jealously guarding their energy assets, which
were, in fact, milch cows, each year providing steaming flows of public

Bring out
the fencing wire and the lawyers. The energy ministers of each State and
Territory, and the Commonwealth, could agree on a draft bill establishing a set
of rules, a central operator (NEMMCO) to manage the show, and an administrator to
oversee the regulations. Each government
could pass the bill without amendment and the scheme could be run as though it
really was a national system. Such
legislation, identical in all jurisdictions, is called template legislation. It had been used before for other, relatively minor matters, to bring regulation into ‘harmony’ across the country.

A neat
trick – except there was a snag and, wouldn’t you know it, it was the South
Australians. Years ago they decided that they wouldn’t pass or even consider template
legislation. In this case they would
only come to the party if they could debate and vote on the legislation before
anyone else did. If they passed it first,
they judged that it would be original, not template, legislation. Even then, for the scheme to work,
the South Australians had to agree that the South Australian Parliament
wouldn’t amend the draft that the other Ministers had agreed to. A bit more fencing wire was unwound, but in
the end everyone signed.

South Australia could have the debates and voting
and all that carry on, and everyone else, including the Commonwealth, would
pass what is called an Application Act.
All the pollies could get around a table somewhere, agree on the exact
terms of the new electricity law for a linked, centrally administered system,
and South Australia
would pass it. All the others would then
pass their own Application Acts making the South Australian electricity law,
which is called the National Law, also the law of each of the other States or
Territory. No sweat.

And Now the

Not only
that – watch this one: those Application
Acts also provided that if the South Australians amended the law at any time,
after agreement with all the other jurisdictions, then those amendments would apply everywhere
else, without further debate in any of the other Parliaments, including the
Commonwealth. So that’s what they all
did, back in 1997 and 1998, with very little worry anywhere, because everybody
thought it was such good housekeeping. If
all the energy ministers wanted something changed, the South Australians would
obligingly amend their law and it would automatically come into force in all
the other jurisdictions.

Every so
often the minister responsible in South
Australia gets up and fires the starting shot for
something new. Adelaide
passes it, sometimes with a few squawks from Democrats or Libs or Nats then all
the Application Acts click home and the system changes. And so it has gone: amendments to the South
Australian National Electricity Law, wholesale changes to the way the system is
run. There have been far too many
changes even to list here.

On 9
April 2008, Mr Condon, the Energy Minister in the South Australian
Parliament, introduced the National Gas Law – yes, a South Australian national gas

The Government is again delivering on a key energy
commitment through new legislation to improve the governance arrangements for
the regulation of natural gas pipeline services, for the benefit of South
Australians and all Australians.

And he went
on to outline a vastly complex and important new legal and economic system for
gas access modeled, as he said, "on the changes made to electricity regulation
in the 2005 and 2007 amendments to the National Electricity Law". Application Acts in other Parliaments were
duly passed, with the same provisions as for electricity that the South
Australian law could be amended without debate of the issues in other
Parliaments, including the Commonwealth.

Here is
part of what the NSW Parliament’s Legislation Review said about the National
Gas (New South Wales)
Bill after it was introduced on 11 April:

What appears remiss in the scheme is the absence of any
realistic scrutiny role for the NSW Parliament… Although the NSW Parliament
has the present Bill before it there is no scope to debate the need for any
modification of the National Gas Law as it has already been signed off by all
parties including NSW.

Exactly. We have all been disenfranchised.

constitutional lawyers, including most (but not all) of the official ones,
think this is legally OK. Some
don’t. There’s been no High Court case
to test it yet. But don’t let us get confused.
Whatever the lawyers might say about it, we – you, me, all of us, even
the South Australians – have been dudded on democracy. Do you think they would use this malarkey for,
say, a national child care system, or a national medical scheme? Of course not – the mums and dads would be in
the streets. But in as crucial an area of policy as energy, they use it because
they think it’s too technical for the
punters to notice.

Another Way?

What if,
one day, the government of South
Australia changes and won’t play ball, or another
government decides there is something it doesn’t like? What if, when Professor Garnaut walks in with
his report on what is to be done about climate change, the Commonwealth decides
that it is really going to set up an Emissions Trading Scheme and do other
things to reduce greenhouse gas emissions? The energy laws and the NEM will
have to be changed, and generators and networks and retailers will have to do
things differently, and we all might have to pay more. There’ll be many
ructions. Are we all going to sit on our
hands while whatever is needed is
debated and perhaps passed in South

Don’t get
me wrong – if anyone is going to make up my mind for me I couldn’t imagine anyone
better to do it than a South Australian.
But you get the point, don’t you?
We’ve been disenfranchised. Full
credit for ingenuity to the legal eagles, the sparks engineers, the hard men of
the public service who got the system up.
This is no way to run a national energy system, or a nation.

Is there some alternative? For several years, governments have been moving towards what they call
national regulation whereby, under cooperative arrangements between the States,
Territories and Commonwealth there will be central bodies administering all the
laws and running the market. At present
the individual jurisdictions still decide on quite a lot – what bills you pay,
for example; but, under what is proposed, the central bodies will run the NEM
completely. Some lawyers think that,
now, following a fairly recent decision of the High Court, it wouldn’t be too
difficult legally for the Commonwealth, under the corporations power of the
Constitution, to take over those bodies, and policy, and thus the whole
caboodle. The Feds wouldn’t own the
assets, of course, but many, including the States, would regard it as a power
grab, no pun intended. You can see the headlines now. But at least then we would have the
national power system we need, the issues would be debated in Canberra for everyone to hear, and we’d all
get a chance of voting on them when the Federal elections came around.

More About the Author

Professor Gavan McDonell has directed four public
enquiries for State and Federal governments, including the NSW
commission recommending, as subsequently implemented, abandonment of
planned power stations worth $12 billion, restructuring of the power
industry and development of linked regional markets. He designed the
economic principles for the NEM’s Ancillary Services Markets, probably
the world’s first, and gave the National Electricity Tribunal decision
which resulted in the rewriting of the ACCC’s regulatory test of major
network investment. With long international experience, including as a former
senior investment banker supervising energy and transport investments
in the Caucasus and Central Asia, he is currently advising on Asian
energy markets research. See also: Gavan McDonell.


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