These changes to the National Electricity Rules and National Gas Rules improve the strength and capacity of the regulator to determine network price increases so consumers don’t pay any more than necessary for the reliable supply of electricity and gas.

The Commission’s determination means the Australian Energy Regulator (AER) can better adapt its approaches to the nature of the business it is regulating.

It clarifies the AER’s powers to undertake benchmarking, including requiring the regulator to publish annual reports on the relative efficiencies of electricity network businesses. And it promotes greater confidence in the decisions of the regulator and the regulatory process.

The determination also includes changes to the rate of return provisions in the National Gas Rules (NGR) which are applied by the AER in the eastern states and the Economic Regulation Authority in Western Australia.

The final rule determination and final rule on the network regulation rule changes under sections 102 and 103 of the National Electricity Law (NEL) and sections 311 and 313 of the National Gas Law (NGL) were published by the AEMC on 29 November 2012.

The final rule determination confirms the Commission’s final decision on the rule change requests from the final position paper and covers all aspects of the rule change requests including the transitional arrangements.

The final rules better equip the regulator to develop methods and processes to achieve efficient outcomes in setting prices for consumers, whilst also providing it flexibility to adapt its approaches to the nature of the business it is regulating.

The final rule determination has been informed by numerous submissions from stakeholders, public forums and workshops, as well as consultant reports, which are all available below. The AEMC has also prepared a summary information sheet which is available in the final rule determination section below.

Key changes

The most significant factors that determine the revenues of network businesses are their rates of return on capital and the size of their regulated asset bases. The final rule will make significant changes to these areas, as well as others.

The AEMC final rule determination makes changes to the rules in four key areas:

1.  Rate of return (under the NER and NGR)

The AEMC has developed a new rate of return framework that is common to electricity distribution, electricity transmission and gas. It requires the regulator to make the best possible estimate of the rate of return at the time a regulatory determination is made. It requires the regulator to take into account market circumstances, estimation methods, financial models and other relevant information.

The regulator is required to undertake an open and consultative process at least every three years to develop its approach to setting the rate of return.

The common framework also enables the regulator to take a range of different approaches to estimate the return on debt component, potentially allowing for reduced risk for debt financing for network businesses.

2.  Capital expenditure incentives (under the NER)

The final rule determination provides for new tools under the NER, such as capital expenditure sharing schemes and efficiency reviews, so the regulator can incentivise network service providers to invest capital efficiently.

The regulator can apply the tools as it considers appropriate to each network business, having regard to an overall objective. That objective is that only capital expenditure that is efficient should form part of the regulated asset base.

The benefits of reviewing the efficiency of past capital expenditure include contributing to the regulator’s analysis when assessing expenditure proposals and setting future expenditure allowances.

3.  Capital expenditure and operating expenditure allowances (under the NER)

The final rule determination improves the clarity and removes ambiguities regarding the powers of the AER to interrogate, review and amend capital and operating expenditure proposals submitted by network service providers.

Under the final rule, the AER is also required to publish annual benchmarking reports, which will assess the relative efficiencies of network businesses.

4.  Regulatory process (under the NER)

The regulatory determination process is lengthened by four months among other changes in order to enhance stakeholder involvement particularly by community representatives.

In addition to these four key areas of changes, arrangements to transition businesses to the new rules have been included. These have been designed so the new rules can be applied as soon as possible.

Background

On 29 September 2011, the AER submitted two rule change requests to the AEMC. One rule change request related to various aspects of the economic regulation of electricity transmission and distribution services under the NER. The other related to the framework for the determination of the rate of return for gas services under the NGR.

On 18 October 2011, the AEMC received a rule change request from an Energy Users' Rule Change Committee representing Amcor, Australian Paper, Rio Tinto, Simplot, Wesfarmers, Westfield and Woolworths (the EURCC). The rule change related to the calculation of return on debt as part of the overall cost of capital under Chapters 6 and 6A of the NER. This was also one of the issues dealt with in the AER’s electricity rule change request.

On 20 October 2011, the AEMC gave notices under section 95 of the NEL and section 303 of the NGL to initiate and assess the AER's rule change requests.

Given that the proposals raised issues in the rules on similar subject matter, on 3 November 2011, the AEMC gave notice under section 93(1)(a) of the NEL to consolidate the proposal by the EURCC with the AER's electricity rule change request proposal. The result of this consolidation was the creation of a new consolidated rule change request which would run to the same process and timetable as the original AER rule change proposal.

In addition, given the interdependency of issues and the proposed rules noted by the AER in its rule change request for rate of return provisions of the NGR and the NER, the AEMC is considering these requests under the same process and timetable.

Due to the complex nature of these rule change requests, on 20 October 2011 and 3 November 2011, the AEMC issued notices under section 107 of the NEL and section 317 of the NGL to extend the period of time for the making of the draft rule determinations on these rule change requests to 26 July 2012.

On 20 October 2011, the AEMC issued a consultation paper on the AER rule changes requests and on 3 November 2011 it issued a consultation paper on the EURCC rule change request. The AEMC held a public forum in Brisbane on 23 November 2011 to facilitate discussion on the rule change requests. These presentations are available below.

Submissions on the two consultation papers closed on 8 December 2011.

On 2 March 2012, the AEMC published a directions paper on the rule change requests. The directions paper explains the AEMC’s initial positions on, and sets out its next steps to progress these rule changes requests.

A series of workshops were also held on 2 April 2012 in Melbourne to discuss some of the key issues raised in the directions paper. The summary notes prepared by AEMC staff for each workshop are available below.

Submissions on the directions paper closed on 16 April 2012.

The AEMC held a public forum in Sydney on 9 May 2012 with Professors Littlechild and Yarrow. Professors Littlechild and Yarrow presented on the papers they provided for the AEMC’s directions paper, which provided stakeholders with the opportunity to raise questions with them. These presentations are available below.

The AEMC also held a cost of debt workshop in Sydney on 18 May 2012. This workshop discussed some of the key issues on the EURCC’s proposed historical trailing average approach to estimating the cost of debt allowance. The questions that were discussed and a presentation by the AEMC’s consultant, SFG Consulting are available below.

On 21 June 2012, the AEMC issued further notices under section 107 of the NEL and section 317 of the NGL to extend the period of time for the making of the draft rule determinations to 23 August 2012. The purpose of this extension was to undertake an additional round of consultation on cost of debt issues.

On 21 June 2012, the AEMC published a Consultation Notice for an additional round of consultation on cost of debt issues before publishing its draft determinations. Submissions on the Consultation Notice closed on 5 July 2012 and are available below.

On 23 August 2012, the AEMC published its draft determination and draft rules. Submissions on the draft determination and draft rules closed on 4 October 2012.

On 14 September 2012, the AEMC published a consultation paper on proposed arrangements to transition service providers to the proposed new rules.

Submissions on the consultation paper, consultation rules and alternative proposal put forward by TransGrid closed on 25 October 2012.

On 15 November 2012, the AEMC issued notices under section 107 of the NEL and section 317 of the NGL to extend the period of time for the making of a final rule determination on these rule changes to 29 November 2012. The purpose of this extension was to allow for additional consultation and analysis on transitional arrangements in respect of the rule changes.

On 15 November 2012, the AEMC also published a final position paper and final position rules on these rule changes. The final position paper reflected the Commission’s final position on the rule change requests and formed the basis of the final rule determination. It covered all aspects of the rule change requests except for the transitional arrangements.

On 29 November the AEMC published reports under section 108A of the NEL and section 320 of the NGL relating to these rule change requests not being finalised within 12 months of their formal commencement.