On 2 August 2012, the AEMC published a final rule and associated final rule determination on proposed amendments to the operation of the cost pass through provisions for electricity network businesses.

The final rule will enable a transmission business to nominate additional pass through events at the time of submitting its revenue proposal to the Australian Energy Regulator (AER). This will provide these businesses with the opportunity to recover the efficient costs associated with events that are outside of their reasonable control.

However, to support the incentive regime and ensure that the cost pass through provisions are utilised only when event avoidance, mitigation, commercial insurance and self-insurance are less appropriate, the final rule introduces the nominated pass through event considerations for both transmission and distribution businesses

These considerations are of a high level and do not stipulate any specific action. Furthermore, the AER is not limited to these considerations, and may include any other matter it considers relevant and which the AER has notified the NSPs is a nominated pass through event consideration.

Enabling network businesses to nominate additional pass through events allows each event to be crafted to the individual circumstances of the business. This has enabled the removal of the prescribed terrorism event from the NER, which is consistent with the decision not to include the natural disaster or insurance cap events proposed by Grid Australia in the final rule.

The final rule also addresses the ‘dead zone’. This will enable all network service providers the opportunity to recover their efficient costs if a cost pass through event occurs in the final year of a regulatory control period.

Where required, transitional arrangements have been provided.

Background

On 14 October, Grid Australia submitted a rule change request regarding amendments to the operation of cost pass throughs to electricity network service providers.

Grid Australia considered that under the current rules network service providers are exposed to the risk of significant cost impacts arising from natural disasters and potential third party insurance related liability claims that are outside of their reasonable control. To address this perceived problem, Grid Australia proposed four amendments to the NER relating to the operation of the cost pass through provisions.

Furthermore, in support of its rule change request, Grid Australia provided a report from Marsh Risk Consultants on "quantification of the cost of specific low probability, high impact events and associated availability of commercial insurance".

On 2 February 2012, the AEMC published the rule change request from Grid Australia, and an associated consultation paper. Submissions on the consultation paper closed on 1 March 2012.

The AEMC subsequently published a draft rule and associated draft rule determination on 12 May 2012 in relation to this matter. Submissions on the draft rule determination closed on 21 June 2012.