On 2 October 2014, the AEMC made a final rule in relation to the Setting the Opening Capital Base rule change request. This final rule amends how economic regulators calculate the value of a regulated gas pipeline for each access arrangement period. The calculation must now include the removal of any benefit or penalty arising from the difference between estimated and actual capital expenditure in the final year of a prior access arrangement period.

Under the final rule, reference tariffs are more likely to reflect efficient utilisation of, and investment in, pipeline services because they would be less likely to be influenced by gains or losses unrelated to the efficiency of the service provider. It preserves the incentive framework of the regulatory regime that rewards service providers when they spend less capital expenditure than forecast. This outcome is consistent with and contributes to the achievement of the national gas objective.

Background

On 11 November 2013, the Australian Energy Regulator (AER) submitted a rule change request proposing to modify the National Gas Rules (NGR) to require the AER or, in Western Australia, the Economic Regulation Authority to remove any benefit or penalty associated with the difference between estimated and actual capital expenditure in the context of setting the opening capital base for an access arrangement period.

The AER considered that the proposed change was required to prevent pipeline service providers from experiencing benefits or losses due to a difference between the estimated and actual final year capital expenditure used to set the pipeliner’s opening capital base.

Gains or losses unrelated to the efficiency of service providers, the AER submitted, conflict with the national gas objective because they can adversely affect pipeline investment and usage incentives, and lead to price distortions.

The rule change request arose out of two decisions of the Australian Competition Tribunal and a desire by the AER to provide clarity on this issue.