Economic regulation of network service providers and price and revenue regulation of gas services

Draft determination and draft rules released for public comment

The AEMC today proposed new rules to better equip the regulator to set network prices so consumers don’t pay more than necessary for reliable supplies of electricity and gas.

Public submissions on the proposed rules are due on 4 October before a final determination in November 2012.

Final rules would be in place by November 2012.

The draft determination would:

• allow the Australian Energy Regulator (AER) to benchmark network businesses against each other;
• require the AER to publish annual benchmarking reports on network business performance;
• allow the AER to take past efficiency into account when determining future spending allowances for network businesses;

AEMC Chairman, John Pierce, said the draft rules were now available for public review and comment before a final decision was made.

“This draft determination aims to improve the capacity of the AER by giving it new tools to determine efficient costs for each regulated business – and enabling it to decide what costs are efficient.”

“Pricing rules for transmission businesses (2006) and distribution businesses (2008) were made at a time when the biggest concerns were the risk of underinvestment in infrastructure and meeting reliability standards put in place by the governments of the day. The experience of the first full cycle of regulation tells us that improvements can be made – especially around the flexibility available to the regulator to adjust its approach to changes in operating environments,” Mr Pierce said.

There is no one single cause of the rising costs of providing electricity and gas network infrastructure. The revenues required by these network service providers are impacted by the external environment such as electricity demand, the cost of capital, and the reliability standards expected by the community. Regulation is directed to promoting efficiency. Price outcomes are also impacted by the effectiveness of management and shareholder oversight of network businesses.

In addition to these draft rule changes, the AEMC is working across the electricity and gas supply chains to identify other areas where changes can be made to improve the efficiency of the total system. This work includes looking at ways for consumers to have more control over the way they access electricity and the prices they pay through our Power of Choice review. The Transmission Frameworks Review is looking at ways to reduce long-term price pressures. The NSW reliability review is looking at the costs and benefits of different levels of reliability outcomes for NSW consumers. Advice on all of these areas will be provided to government over the next few months.

For information contact:

AEMC Chairman, John Pierce (02) 8296 7800

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