Market Review: Completed

Overview

The AEMC has published its Final Report on its Review into the use of total factor productivity (TFP) for the determination of prices and revenues. In this review, the AEMC found that using a TFP-based methodology could contribute to improvements in electricity and gas network regulation to achieve more efficient outcomes for consumers. Before the implementation could be considered, more consistent and robust data on network business’ inputs and outputs needs to be collected and reported to the regulator. This data will improve the application of the current regulatory framework.
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The AEMC has published its Final Report on its Review into the use of total factor productivity (TFP) for the determination of prices and revenues. In this review, the AEMC found that using a TFP-based methodology could contribute to improvements in electricity and gas network regulation to achieve more efficient outcomes for consumers. Before the implementation could be considered, more consistent and robust data on network business' inputs and outputs needs to be collected and reported to the regulator. This data will improve the application of the current regulatory framework. Once such data is collected, the Ministerial Council on Energy (MCE) could then assess if the conditions required for introducing a TFP-based methodology are met. The MCE would also need to consider the merits of offering it as an alternative to the building blocks approach at that time. For these reasons, the AEMC is at this stage proposing initial rules which will facilitate data collection and the assessment of whether the necessary conditions for introducing TFP are met.

Background

On 21 November 2008, the AEMC announced that it would conduct a review into the possible applications of a TFP methodology in the determination of prices and revenues (TFP Review). The need for this review was identified as a priority by the AEMC following its consideration of initial submissions on the Rule change proposal in relation toTFP for distribution network regulation lodged by the Victorian Minister for Energy and Resources. This review sought to provide advice to the MCE on:

  • the circumstances in which an application of a TFP based price setting methodology would contribute to the National Electricity Objective (NEO) and National Gas Objective (NGO);
  • the arrangements (including information, reporting and data requirements) that need to be put in place to facilitate its application; and
  • as appropriate, the development of proposed rules to support the applications of a TFP based form of control for any individual or group of electricity or gas distribution or transmission service providers.

The AEMC adopted a staged approach to addressing the question of whether a TFP methodology should be used in pricing and revenue decisions.

To commence its first stage assessment, the AEMC published a Framework and Issues Paper on 12 December 2008.

On 28 April 2009, the AEMC published a revised statement of approach including a revised timeline for the TFP Review. This revised approach was formed to address issues raised in submissions to the Issues Paper. As part of this process, the AEMC published three consultant reports in June 2009. 

On 23 July 2009, the AEMC revised its timeline for the TFP Review to allow for sufficient time to take into consideration:

  • new material and submissions that have been received; and
  • the development of a TFP design discussion paper.

On 28 August 2009, the AEMC released its TFP design discussion paper and submissions closed on 30 October 2009.

The AEMC also held two workshops with regard to the design discussion paper in Sydney on 28 September 2009 and 2 October 2009.  The first workshop focused on the electricity sector, while the second workshop focused on the gas sector.  All stakeholders were invited to attend these workshops.  Presentations and a summary of the discussions at these workshops are available.

On 17 December 2009, the AEMC released its preliminary findings paper with three accompanying consultants' reports. Submissions closed on 26 February 2010.

On 1 February 2010, the AEMC held a public forum in Melbourne with respect to the preliminary findings. Presentations and a summary of these discussions  at this forum are available.

On 1 July 2010 the AEMC released a TFP model prepared by consultants Economic Insights. This model is accompanied by an analysis of various scenarios and a technical report.

On 12 November 2010, the AEMC published its Draft Report for the Review into the use of total factor productivity for the determination of prices and revenues. On 29 November 2010, the AEMC held a workshop at the AEMC Offices to explain the workings of the Economic Insights model and also how the AEMC had regard to the modeling results in reaching its draft recommendations. Submissions on the Draft Report were received during December 2010 and January 2011. 

On 7 July 2011, the AEMC published its final report.

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Documentation

FINAL

AEMC documents

INITIATION

AEMC documents

AEMC workshop

Late submissions

Public forum

Reference material

Submissions

Submissions on Discussion Paper

Submissions on Issues Paper

Supplementary submissions

TFP model report and base case model

TFP scenario models