The owners of Australia’s $9 billion electricity transmission networks spend more than $0.5 billion annually on the infrastructure that connects power stations to customers. The transmission regulation regime must facilitate continuing efficient investment to deliver reliable, secure and affordable electricity to households and workplaces into the future.

The Australian Energy Market Commission (AEMC) today released a Proposal to establish new rules for the regulation of transmission system revenue. It called for submissions which are due by 20 March 2006. It also announced that a public hearing on issues raised by the Proposal will be held in Melbourne on 8 March 2006.

AEMC Chairman, Dr John Tamblyn, described the Rule Proposal for transmission system revenue as the first stage of the Commission’s ongoing program of reform of transmission regulation.

“Transmission is the backbone of the national electricity system – it is the physical network that allows effective competition for generators and retailers across the interconnected electricity market,” he said.

“Submissions to the AEMC from a majority of network operators and users have highlighted the need for greater certainty in the Rules to provide a more certain environment for long-term infrastructure investment”, Dr Tamblyn said.

“We believe that today’s Proposal strikes the right balance between incentives for efficient investment and operation, managing the market power of network operators and the Regulator’s requirements for transparency and accountability – and of course the Proposal is now subject to more consultation,” he said.

"The Commission’s Rule Proposal has been designed to facilitate more efficient network investment and operation, thereby promoting competition and efficiency in the electricity wholesale and retail markets.”

"These developments should provide long-term benefits for energy-using industries and households in terms of more efficient prices and reliable electricity supplies”, Dr Tamblyn said.

Broadly speaking the Proposal released today addresses three priority needs in the transmission services market;

Aligning the long-term incentives of transmission operators with those of network users through incentives for:

  • Greater reliability at times of most value to market participants;
  • Commercial negotiations between network operators, generators and large direct customers; and
  • Contestable service delivery and adoption of non-network solutions where feasible.
Establishing an environment for more certain long-term investment by:

  • Requiring the Regulator to accept capital and operating expenditure forecasts it assesses as reasonable estimates on the basis of specified criteria; and
  • Specifying in the Rules the method for determining the Weighted Average Cost of Capital (WACC) and fixing key WACC parameters for five years before they are reviewed.
Providing greater certainty and transparency in regulatory methods and processes by:

  • Codifying the form of regulation, the methodology for determining regulated revenues and the form of associated incentive regimes; and
  • Specifying in the Rules a propose-respond process and fixed timetables for regulatory decision making.

The greater clarity, certainty and transparency of regulatory process and decision-making reflected in the Draft Rule means that it is necessarily more extensive and detailed than the current Rule.

This Rule-based approach to energy regulation is consistent with the separation of Rule making and Rule administration which is a central feature of the new energy market institutional and governance arrangements which saw the establishment of the AEMC and the AER in 2005.

It also responds to a majority view in stakeholder submissions which called on the AEMC to deliver greater clarity and certainty in the new Rules in order to create a more certain environment for long-term investment in the transmission network.

Because of the significance of the Review, the AEMC is undertaking a two phase process with revenue regulation to be completed in 2006, and price regulation to be completed by early 2007.

In formal terms the AEMC is today releasing a section 95 Notice under the National Electricity Law advising of a Rule change proposal and seeking submissions on that proposal.

For information contact
AEMC Chairman, John Tamblyn (02) 8296 7800
AEMC Public Affairs, Prue Anderson (02) 8296 7800 or 0404 821 935