Progressive approaches to energy sector regulation

Australian Energy Market Commission (AEMC) Chairman, John Pierce, has addressed the Canadian Association of Members of Public Utility Tribunals (CAMPUT) in Ontario, Canada. He was invited to address CAMPUT’s annual conference “Serving the Public Interest: The Regulator’s Balancing Act” in a session on progressive approaches to utility regulation (12.30am Wednesday 8 May 2013 AEST).

AEMC Chairman John Pierce said today regulators around the world face common challenges in walking the fine line between over and under regulation when it comes to serving the public interest.

“It is important not to limit consumer choice through over regulation.

“At the same time it is important not to expose consumers to costs and risks that ought to be managed by energy companies.

“We are guided in this task by a unifying theme – the role and power of incentives to affect consumer and company behaviour.  Regulators generally recognise that, rather than trying to direct behaviour, regulation should create the right incentive framework for effective decision-making.

“In Australia the AEMC takes an evidence-based approach based on extensive consultation with stakeholders across the community, business and government sectors.

“Today I will discuss two examples of regulation in Australia’s National Electricity Market (NEM) that sit at opposite ends of the regulatory spectrum – network regulation and identifying opportunities for efficient demand side participation.

“Both are good examples of the regulatory balancing act – creating incentives for business to invest and innovate while enabling benefits to flow to consumers,” Mr Pierce said.

Key points

  • Natural network monopolies are regulated to manage the risks of monopoly behaviour and in Australia this is primarily achieved through regulating the maximum revenue a monopoly business can earn over a regulatory period.
  • Incentive regulation uses rewards and penalties to encourage good performance. It works by specifying a goal for a network business to maintain network reliability in the face of expected demand. A multi-year budget based on a forecast of the total finance needs of a business is then approved. If the regulated business can outperform the forecast budget during a regulatory period it can retain some savings and pass the rest on as lower prices for end users.
  • The AEMC recently changed the national electricity and gas rules to provide the Australian Energy Regulator (AER) with new tools to strengthen the incentive framework for network businesses. The rules give the regulator greater capacity to put incentives on businesses to manage their capital expenditure programs efficiently. Potential constraints on the way the AER can use benchmarking to assess business efficiency were also removed. Further changes included giving the AER the power to disallow inefficient over-spending and requiring businesses to publicly demonstrate effective consumer consultations during the regulatory determination process introduced.
  • The impact of our new rules on network regulation (announced November 2012) should be reflected in the next cycle of network determinations conducted by the AER, which begins in July 2014 in New South Wales. The AER is currently running public consultation on the guidelines for the implementation of the rules.
  • While the rule changes should help to deliver more efficient investments, the incentive framework for network businesses is broader than the rules – the price and service outcome experienced by consumers are a function of the rules, the application of the rules by the regulator, and the corporate governance of network businesses. Other external factors, such as the reliability standards set by governments, can also have a significant impact on investment needs. 
  • In November 2012 we also provided a wide-ranging package of recommendations to governments on ways for consumers to exercise greater choice in how and when they use electricity (the AEMC Power of Choice Review).
  • Among the Power of Choice recommendations were:

-        improvements to market and regulatory arrangements to better facilitate cost reflective pricing for residential and small business customers;

-        regulatory changes to encourage more flexible pricing on the networks component of retail bills;

-        a proposed model to encourage commercial investment in smart meters.


Read the J. Pierce conference paper

Carrots, sticks and tightropes: The regulator’s balancing act in incentivising efficient behaviour, Canadian Association of Members of Public Utility Tribunals, Annual Conference May 2013, Ontario Canada


For information contact:

AEMC Chairman, John Pierce (02) 8296 7800


Media: Communication Manager, Prudence Anderson 0404 821 935 or (02) 8296 7817


Wednesday 8 May 2013