The Australian Energy Market Commission (AEMC) today released a directions paper on rule improvements to ensure that monopoly energy networks charge no more than necessary for electricity and gas services.

The directions paper provides the AEMC’s initial response to rule change requests from the Australian Energy Regulator (AER) and a coalition of companies who are large energy users called the EURCC (Amcor, Australian Paper, Rio Tinto, Simplot, Wesfarmers, Westfield and Woolworths). These rule change requests seek to change the way revenues are set for electricity and gas network businesses and are based on concerns that energy network businesses are overspending and passing on costs to customers.

The AEMC has agreed that some areas of the energy market rules could benefit from enhancement, specifically:

- how the regulated asset base is determined for individual network companies;

- how the rate of return is set for companies; and

- how to improve the process for making regulatory determinations.

Submissions on the directions paper are due by 16 April 2012.

AEMC Chairman, Mr John Pierce, said today the proposals under consideration were all about making sure that the energy market rules give the national regulator sufficient powers to ensure electricity and gas businesses charge no more than necessary for services.

“We are examining the regulatory framework’s ability to give consumers reliable energy services at efficient prices so they don’t pay more than needed. We are balancing other interests including those of network businesses and Australia’s need for investment in the energy sector.”

“As always we are focussed on providing the right regulatory environment for a sustainable energy industry which can respond to changing market conditions and supply Australia’s energy needs into the long term,” Mr Pierce said.

The AEMC’s consideration of process matters will cover how effectively consumers are able to engage in the process. This will include the access consumers have to information which the regulator uses to make its decision, and whether a new consultation step in the regulator’s process is justified. It may also extend to the way consumers, the regulator and network businesses interact generally.

Views on our thinking are sought in relation to three areas.

Capital and operating expenditure

The AER is required to consider expenditure forecasts provided by electricity network businesses. If the AER does not approve the expenditure it may replace forecasts with its own estimates. Any expenditure beyond these forecasts is not subject to regulatory review. The AER is concerned that the rules restrict its ability to amend forecasts, resulting in network costs being set at higher than efficient levels.

  • The Commission’s initial view is that the AER needs more power to exclude expenditure beyond the approved forecasts that is inefficient. In addition the current approach may create incentives to defer expenditure inefficiently.
  • The Commission seeks more evidence to understand the drivers of increasing network costs. This will help determine the extent to which AER powers (or lack of powers) are contributing to increasing costs.
  • The Commission will also consider further the policy intent in this area.

Rate of return

The rules allow for network businesses to earn a return on their investments. There are different approaches to determining investment return for electricity distribution, electricity transmission and gas. The AER proposes that the three sectors move to a single approach – leaning towards the electricity transmission model in which there are periodic reviews of rate of return parameters which are then fixed for each company.

The Commission agrees that current rules are not satisfactory but that electricity distribution and gas approaches are more flexible and therefore preferable. We would prefer a single framework for all three sectors, but will consider the alternatives.One component of rate of return decisions is the cost of debt. The Commission agrees with the AER and EURCC that the current approach is problematic. Some aspects of the EURCC have some merit, particularly regarding the selection of an appropriate benchmark. The Commission will consider whether the rules should permit the AER to consider and adopt an option such as this.The Commission does not agree that there should be a different approach to the cost of debt for government owned and privately owned businesses.

Regulatory determination process

The AER has raised issues relating to the ability of stakeholders to engage effectively in the regulatory determination process. Related to this is whether the AER can adequately consider material submitted as part of its process. The Commission shares some of these concerns and will consider improvements to the process in general to ensure stakeholders have opportunities to provide input and the AER has sufficient time for its decisions. The success of the process is also dependent on other factors, such as the capacity of stakeholders, and in particular consumers, to participate.

The AEMC will release its draft determination for public comment in July 2012. Its final determination on this matter is due by October 2012.

For information contact:

AEMC Chairman, John Pierce (02) 8296 7800

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