Too many cooks?

Electricity is a hot topic. Increasing prices have led to cries to do ‘something’ and a blame game between the Commonwealth, sensitive to the impact of the carbon tax and the states which still own most electricity transmission and distribution infrastructure. This has led to a bewildering array of reviews – enough to confuse anybody with a stake in the industry.

The attached table1 identifies the key reviews, grouped by the following themes:

  • General Industry and Economic Reviews;
  • Transmission and Distribution Reviews;
  • Generation and Retail Reviews; and
  • Technical Reviews.

Many of these reviews deal with similar, if not identical, issues. This overlap is costly for business – electricity participants are involved in a broad range of reviews, seeking to protect their interests. It also poses challenges for governments as they try to develop coherent policies based on a vast array of reports and recommendations.

The Productivity Commission review is probably the most over-arching of the reviews and contains a number of controversial recommendations, covering similar issues to the Energy White Paper released on 8 November 2012 by the Department of Resources, Energy and Tourism and other reviews.

Some of the Productivity Commission’s draft recommendations were part of the plan which the Prime Minster announced on 2 December 2012 that she would be taking to the next meeting of COAG, including smart meters, time-of-use pricing, creation of a consumer advocacy body and expanded powers for the AER.

Productivity Commission Review

On 18 October 2012, the Productivity Commission released a draft report in relation to its review of Electricity Network Regulatory Frameworks. The report identified a range of problems and proposed some potential solutions. 

  • Network ownership–privatisation of the remaining state owned transmission and distribution companies would improve efficiency and reduce costs.
  • Price regulation–the regime could be amended to ensure all utilities are regulated by a price cap, not a revenue cap; changing a critical element of WACC to use historic costs of debt rather than current ones; incorporate closer scrutiny of capex overspend and several other changes.
  • Focus on consumers–a new consumer body, funded by a new industry levy, to participate in the regulatory process to allow closer scrutiny of price regulation by consumer interests.
  • Demand management–require distributors to charge retailers for consumption during periods of high demand to force them to adopt time of use tariffs as smart meters are rolled out.
  • Reliability–decisions about distribution reliability should be based on customers’ valuations not prescriptive standards and be consistent across the NEM. Reliability standards for transmission should be set on a NEM-wide basis, involving a single transmission planner.
  • Governance of regulators–review of the AER to ensure it has the resourcing, expertise and capacity to fulfil its obligations. Possible separation from ACCC and funding through another industry levy.
  • Benchmarking–to be used to better inform decisions and address the information asymmetry that makes it difficult for AER to assess the efficiency of business proposals.
  • Interconnectors–finding that the regulatory test is appropriate and there has not been under-investment in interconnectors but recommending reforms to influence bidding behaviour and change the way generators pay for access