Unified front: Insights for ring fencing success

8 minute read  03.06.2024 Joao Segorbe, Katrina Groshinski, Naveena Rajaretnam, Sharon Tumber and Abby Fivel

Navigating the ring fencing paradigm - commercial, risk, regulatory and legal

Ring fencing rules span across many industries. They often come into play when the interaction between two business areas or functions could impact competition, meaning a virtual separation must be established. These situations include but are not limited to vertical or horizontal integrations, regulated monopolies, and scenarios that can cause confusion among customers. When these situations arise, they can prompt the need for organisational restructure, accounts and cost separation, and, depending on the industry, internal and external operational and behavioural controls around branding, information sharing, or staff sharing may be required.

At MinterEllison, we have a long history of advising industry participants on ring fencing issues in energy, rail, telecommunications, and other economic activities. More recently, our enhanced consulting capabilities have allowed us to extend our services, helping organisations translate ring-fenced structures into operational realities. In our experience, the best outcome for a situation where ring fencing is required is when the right balance is struck along three key dimensions:

  • Legal: the rules and regulations that set the boundaries for the ring fencing solution;
  • Commercial considerations: the impact of the ring fencing solution on efficiency/effectiveness; and
  • Risk & Compliance: the level of risk present and the actions that can be taken to mitigate them.

Getting ring fencing right

Usually, these three dimensions operate sequentially. A commercially-driven decision (e.g., a new market entry or an acquisition) triggers the requirement for legal advice, which in turn, may identify ring fencing requirements. This generally translates into a structural setup, aimed at legal compliance, with some guidelines that are passed on to risk and compliance teams to implement.

From our experience, we have observed that it is the intricate dance between the three dimensions that allows for the best solution to emerge. By concurrently probing and discussing each dimension, the optimal outcome can be achieved by considering what the regulations require or allow, by identifying which controls may be needed and how this can be achieved in a way that makes commercial sense.

Ring fencing in the energy transition

Effective ring fencing is critical to the energy transition. As the world decarbonises, energy markets have become more complex and decentralised. The traditional supply model where generation businesses are located upstream of the network businesses has changed and continues to evolve. Consumers can now also generate energy. Firming assets can be placed anywhere on the value chain – next to generation, within the networks or behind the meter within consumers' premises. New markets are emerging to meet the demands of this constantly evolving sector and with them, new and different opportunities for a diverse range of business models and participants. On top of all of this sits the mounting pressure to accelerate decarbonisation, where all capacity and capabilities within the sector are being tapped to partake in the transition.

The regulators are grappling with these same issues and challenges. Striking the right balance between regulatory intervention and oversight and promoting competition is a consistent feature in commentary by the key industry regulators – the ACCC and the AER. Electricity and gas ring fencing continues to be the priority of policy makers and the AER.

In this ever-evolving landscape, nearly all network and pipeline operators (who are used to operating in a regulated monopoly environment) are establishing business units to address new needs in the sector – normally contestable markets. Energy regulation has set boundaries for these players for a while now, but, as the sector continues to shift, so too do the ring fencing requirements. In line with the approach described above, in our experience, the most effective process to manage ring fencing must allow collaboration between the three dimensions to take place. An approach such as the one illustrated below will almost certainly deliver a better outcome.

Ring fencing: The recommended process

Either one team vs eight or more handovers required.

Learning from experience at MinterEllison

We view ring fencing primarily as a legal challenge that must be initially addressed through sound legal counsel. However, the solution goes beyond just providing written advice; it involves the practical application of the legal requirements. This necessitates a blend of legal acumen, commercial insight, and risk management skills.

Commercially, ring fencing approaches need to be forward-looking to adapt to an entity's growth strategy and an evolving regulatory landscape. Back to the energy transition example, while batteries/storage are still a growing business across the value chain, it is apparent to everyone that it will be a major driver of the transition, and that any setup should take that into account.

From a risk and compliance stand point, we learned that to be most effective, a ring fencing approach must account for the specific teams that will be impacted by it. This encourages a compliant culture and ensures that ring fencing is seen as less of an obstacle from progressing initiatives. Many of the controls that end up being required are behavioural controls – relying on individual responsibility to keep operating within the ring fencing rules. Efficient and effective ring fencing implementation relies on the human element and connects with corporate culture.

Finally, we have also learned that some of the most complex decisions in implementing ring fencing controls are related to IT. By giving IT a seat at the table, we can help ensure the most effective ring fencing outcomes are achieved.

We have found that by running the steps outlined above with a single, integrated team, the analysis and assessment become more comprehensive. This leads to a more cohesive and cost-efficient implementation process. At MinterEllison, we've enhanced our storied legal expertise by incorporating risk management, commercial strategy, and IT consulting capabilities, all underpinned by our unwavering professional and ethical standards. Our integrated approach not only shortens delivery times and cuts costs, but also adds significant value to the business while upholding the highest standards.


Please reach out at any time to discuss how we can assist your organisation in managing its ring fencing obligations effectively and efficiently.

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