The AEMC has today released preliminary findings into the use of TFP as an alternative method to determine regulated prices. The AEMC will be consulting stakeholders on these findings as part of its ongoing review process.
AEMC Chairman, Dr John Tamblyn, said "We have found that establishing national rules to allow the use of TFP in determining regulated prices for electricity and gas service providers would facilitate improved regulatory outcomes. Where it is applied, a TFP methodology for regulation would encourage service providers to improve their performance and also allow users to share in the resulting benefits."
The preliminary finding is that applying a TFP methodology to determine regulated prices would increase the incentive for electricity and gas distribution service providers to seek innovation and cost efficiencies while providing an opportunity to recover efficient costs. There is also potential for such efficiency improvements in the transmission sectors although further analysis is required to determine the practical application of TFP to those sectors.
The AEMC is proposing that:
- Service providers should have the option to choose a TFP methodology but the subsequent ability to opt out should be constrained.
- It is not appropriate to implement a TFP methodology in the short term as the available data is notsufficiently robust or consistent.
Dr Tamblyn said that further work was required to progress the development of a TFP price determination method, including a detailed design of a TFP methodology and improved specification and provision of regulatory reporting data from service providers.
"It is fundamental to good regulatory practice and outcomes that regulatory methodologies are clearly specified and practicable and that consistent, relevant and robust regulatory information be provided to the regulator," Dr Tamblyn said. "These pre-requisites are particularly relevant for the effective implementation of a TFP methodology."
The Review into the use of total factor productivity (TFP) for the determination of prices and revenues was identified as a priority project by the AEMC following our preliminary consideration of a rule change proposal regarding TFP for electricity distribution regulation lodged by the Victorian Minister for Energy and Resources in June 2008. This review will provide advice to the Ministerial Council on Energy on the feasibility of using a TFP methodology for pricing decisions for electricity and gas distribution and transmission service providers as an optional alternative to the current building block approach.
Stakeholders are invited to attend a public forum on the preliminary findings to be held in Melbourne on Monday 1 February 2010. Written submissions on matters raised by the preliminary findings and the accompanying consultant reports are requested by Friday 26 February 2010.
For further information:
AEMC Chairman, Dr John Tamblyn 02 8296 7800
AEMC Communications, Prue Anderson, 02 8296 7800 or 0404 821 935