X
AGL continues to pursue an industry leading retail cost model to achieve operating economies of scale in line with its position as Australia’s largest energy retailer.
AGL has made a significant investment in the four year program (known as Project Phoenix) to rebuild its retail business platform to deliver world-class service and marketing capability. AGL has now completed the last transfer of customer accounts onto a new SAP customer billing and relationship management system. The implementation of Project Phoenix is expected to provide savings in back office and debt management, and increased efficiencies in customer service, sales and marketing and IT/support operations.
Risk is dynamic and is inherent in all external and internal operating environments. Effective risk management is a means for achieving competitive advantage and is pivotal to enabling the ongoing growth and success of our business.
AGL is a recognised leader in the Retail and Merchant energy markets. To continue to strengthen our position, we need to understand the opportunities and challenges our business is faced with, now and into the future.
The environment in which AGL operates has changed significantly over the past decade, predominantly as a result of privatisation, the introduction of competitive markets, industry consolidation and integration along the value chain. This in turn has resulted in considerable change to internal operations, including our risk profile.
The energy operating environment will continue to be transformed, particularly through further consolidation, environmental issues, including carbon policy, the economic environment and other challenges and trends on local and global scales. Embedding risk management principles and practices into strategy development and day to day business processes is critical to achieving robust and proactive commercial outcomes – a balance between mitigating threats and exploiting opportunity.
Just as risk is inherent in our operations, risk management is also inherent in all decision making and management processes. Risk management is essential to good corporate governance and is a fundamental component of good management practice.
A selection of key activities undertaken in 2008/09 to manage business risks is outlined below.
The Carbon Implementation Project commenced in 2008/09, and aims to make all AGL systems and processes consistent with the requirements of the proposed Carbon Pollution Reduction Scheme. The Project involves a number of workstreams including contracts, information technology, employee awareness, electricity and gas trading and regulatory compliance.
A key aspect of this program is a ‘gateway’ approach which allows for the continuing evolution of climate change policy. Rather than commit upfront to a long-term work program, the work schedule provides for flexibility at various times (gateways) so that resource allocation is optimised.
A key issue within the energy sector is the continued regulation of household and small business electricity and gas prices by State Governments. In 2008/09, Victoria became the first State in Australia to discontinue regulation of retail prices. While the other States have also committed to remove price regulation where competition is demonstrated to be effective, current price reviews by State regulators are underway, with new regulated price determinations likely to be in place in Queensland, New South Wales and South Australia over the next 18 months.
AGL continues to be concerned about the price risks that exist for energy retailers where regulated prices do not reflect current energy costs or there have been changes to market conditions and increased costs cannot be passed through to customers on regulated tariffs. AGL participates in price reviews when they arise.
Queensland electricity prices
In April, AGL welcomed the favourable decision of the Queensland Supreme Court in relation to the application for judicial review of the Queensland Competition Authority’s (QCA) final determination of the 2008/09 Benchmark Retail Cost Index (BRCI). The BRCI is the index used to determine regulated electricity tariffs in Queensland. As a consequence, the QCA issued a remade decision for 2008/09 in 2009/10.
New South Wales gas prices
In May 2009, AGL announced an increase in regulated retail gas prices and charges from 1 July 2009 for small gas customers in New South Wales. The increase, which equates to an average of 4.35%, was calculated in accordance with the provisions set out in the Voluntary Transitional Pricing Arrangement (VTPA) agreed between the Independent Pricing and Regulatory Tribunal (IPART) and AGL in 2007. The VTPA was agreed between IPART and AGL commencing 1 July 2007, and extends through to 30 June 2010.
AGL’s activities expose it to a variety of financial risks. These risks include market risk (including foreign exchange risk, interest rate risk and price risk), credit risk and liquidity risk. AGL seeks to minimise the potential adverse effects of these risks by using a range of derivative financial instruments to hedge risk exposures.
A number of commercial optimisation activities are utilised in AGL’s electricity trading division, including:
AGL uses internal production and both long and short term gas contracts to meet its gas supply requirements. Gas is sourced from a number of locations and is transported along a number of different pipelines to minimise supply source risk. We will continue to manage our daily supply requirements which may involve the acquisition of additional daily gas, utilising existing or future underground storage capacity or through additional pipeline capacities.
