ACCC & AER annual report 2016-17

Deliverable 4.1

Provide effective network regulation

The AER’s role in network regulation falls into two broad categories. First, we determine the amount of revenue that network businesses can recover from customers’ use of regulated energy networks (electricity poles and wires, and gas pipelines). Second, we undertake broader oversight of regulated networks. Some roles (such as annual tariff approvals) recur regularly; the timing of others (such as assessing cost pass-throughs, reviewing contingent projects, and resolving connection and other disputes) is unpredictable.

Network revenue decisions

One of the 2016–17 priorities for the AER strategy was to deliver regulatory outcomes to promote efficient investment in energy network services that customers value. During the year we regulated electricity networks and covered gas pipelines in all jurisdictions other than Western Australia. Notably, we began preparing for our first regulatory determination for the Northern Territory electricity distributor Power and Water Corporation, publishing preliminary framework and approach papers in March 2017.

The regulatory framework requires network businesses to periodically submit (usually every five years) regulatory proposals (electricity) and access arrangements (gas) for the AER’s approval. We assess the proposals with regard to legislative criteria, taking account of issues raised in consultation. This process takes around 30 months, when the framework and approach stage is included. Network businesses can appeal our decisions to the Tribunal.

In determining allowable revenues, we account for the efficient costs of providing network services, allowing an adequate return on capital to network owners. We undertake extensive consultation in making network revenue determinations. In electricity reviews we publish a framework and approach, then an issues paper, draft decision and final decision. In gas reviews we publish a draft decision and final decision. Additionally we hold public forums and consult with network businesses and other stakeholders, including consumer representatives, governments and investment groups. The Consumer Challenge Panel advises us on issues important to consumers. We also consult with state and territory consumer representative groups.

In 2016–17 we completed three electricity network revenue determinations (final decisions) and progressed a further 11 processes (see following table). In making our decisions we applied new incentive schemes (with benefit sharing with consumers), adopted a more flexible approach to estimating rates of return, strengthened consultation requirements, and placed greater emphasis on benchmarking to assess electricity network proposals.

Regulatory reviews in 2016–17

Jurisdiction	Business	Determination period	Status
Electricity transmission networks
Qld	Powerlink	1 July 2017– 30 June 2022	Final determination released 28 April 2017
Vic	AusNet Services	1 April 2017– 31 March 2022	Final determination released 28 April 2017
NSW	TransGrid	1 July 2018– 30 June 2023	Proposals received 31 January 2017
SA	ElectraNet	1 July 2018– 30 June 2023	Proposal received 28 March 2017
Vic–SA	Murraylink interconnector	1 July 2018– 30 June 2023	Proposal received 31 January 2017
Tas	TasNetworks	1 July 2019– 30 June 2024	Preliminary framework and approach released 10 March 2017
Electricity distribution networks
NSW	Essential Energy Ausgrid Endeavour Energy	1 July 2019– 30 June 2024	Preliminary framework and approach released 10 March 2017
ACT	ActewAGL	1 July 2019– 30 June 2024	Preliminary framework and approach released 10 March 2017
NT	Power and Water Corporation	1 July 2019– 30 June 2024	Preliminary framework and approach released 10 March 2017
Tas	TasNetworks	1 July 2019– 30 June 2024	Preliminary framework and approach released 10 March 2017 TasNetworks distribution decision for 2017–19 (2-year decision) released 28 April 2017
Gas transmission pipelines
Vic	APA Victorian Transmission Systems	1 January 2018– 31 December 2022	Proposal received 3 January 2017
Qld	Roma (Wallumbilla) to Brisbane Pipeline	1 July 2017– 30 June 2022	Proposal received 1 September 2016
Gas distribution networks
Vic	Australian Gas Networks (Victoria and Albury) Multinet Gas AusNet Services	1 January 2018– 31 December 2022	Proposal received 3 January 2017

Regulatory process improvements

We are progressively strengthening the regulatory framework for energy networks. Some recent improvements are outlined below.

Demand management and innovation

• During 2016–17, we developed a new demand management incentive scheme and innovation allowance mechanism. The scheme’s objective is to incentivise electricity distribution businesses to undertake efficient expenditure on non-network options for demand management. The innovation allowance aims to encourage research and development in demand management projects that may potentially reduce network costs in the longer term.
• We invited submissions to inform the development of a robust, best-practice scheme and allowance mechanism. Consultation closed on 24 February 2017. This was followed up with a ‘Demand Management Options Day’ workshop on 6 April 2017. We will publish the final scheme and allowance mechanism in November 2017.

Ring-fencing

• On 30 November 2016 we published our final ring-fencing guideline for electricity distribution businesses, supported by an explanatory statement. Electricity distribution network businesses must comply with the guideline as soon as reasonably practicable and no later than 1 January 2018.
• The purpose of ring-fencing is to separate the competitive and regulated parts of network businesses to protect the long-term interests of consumers. The guideline supports the development of competitive markets for energy services and efficient investment in network and customer services. We are now working with the sector to facilitate the implementation of ring-fencing requirements by network businesses.

Data management

• We continued to refine our database for collecting, storing and reporting on the large volumes of information received from network businesses.

Consumer Challenge Panel

The Consumer Challenge Panel (CCP) advises the AER on whether network businesses’ proposals are in the long-term interests of consumers; and on the effectiveness of network businesses’ engagement activities with their customers and how this is reflected in the development of their proposals.

Recruitment for the second CCP commenced in August 2016 through an open tender process. The new CCP includes 11 experienced and highly qualified individuals with consumer, regulatory or energy experience and expertise who help bring a consumer perspective to the AER’s decision-making processes. Five previous members from the inaugural panel were retained, and six new members were appointed.

Appeals against regulatory decisions

Network businesses, consumer groups and others participating in our processes can apply to the Tribunal for a limited merits review of our regulatory decisions. A successful review must demonstrate that addressing the grounds of review would lead to a ‘materially preferable outcome in the long-term interests of consumers’. If the Tribunal finds that the AER has erred, it can substitute its own decision or remit the matter to the AER to remake the decision. A network business, consumer or party that has lodged a submission to the AER’s process may also apply to the Federal Court for judicial review of the AER decision or the Tribunal decision.

New South Wales and ACT networks

In May 2015 the New South Wales (electricity and gas) and ACT (electricity) distribution networks applied to the Tribunal for a limited merits review of our regulatory decisions for those networks made in April and June 2015. The grounds for review focused on rate of return issues and the use of operating expenditure benchmarks. The Public Interest Advocacy Centre also applied for a Tribunal review of our decisions on the New South Wales electricity distribution networks, contending that the revenues we allowed were too high.

On 26 February 2016 the Tribunal handed down its decisions. While it did not accept the revenues proposed by the businesses, it remitted the decisions on operating expenditure to the AER to reconsider using a broader range of modelling and benchmarking; a bottom-up review of operating costs (electricity networks only); and the transition to a new method for estimating return on debt (all networks). The Tribunal substituted an alternative value of gamma (relating to tax imputation credits) for all networks.

The AER appealed the Tribunal decisions to the Full Federal Court. On 24 May 2017 the Full Federal Court handed down its judgment on the matter. It upheld the AER’s appeal in relation to the Tribunal’s decision on income tax costs but upheld the Tribunal’s findings in relation to the networks’ operating expenses and the cost of debt. The AER is currently considering the judgment, next steps and any implications for these and other network revenue determinations.

SA Power Networks

SA Power Networks was granted leave in May 2016 to seek merits review of the AER’s November 2015 revenue decision on the network. The South Australian Council of Social Service (SACOSS) also sought leave to appeal this decision, but leave was not granted. The Tribunal conducted the merits review hearing in August 2016. The Tribunal did not accept any of SA Power Networks’ grounds of review. SAPN appealed the Tribunal decision to the Full Federal Court. The Full Federal Court heard this matter in May 2017. The Court has reserved its judgment. SA Power Networks has also sought judicial review in the Full Federal Court of the Tribunal’s decision. This matter has been stayed pending completion of the Full Federal Court’s decision in relation to the AER’s application for judicial review of the Australian Competition Tribunal decisions.

Victoria electricity and ACT gas distribution network

The Victorian electricity distribution networks and the ACT gas distribution network sought merits review of the AER’s May 2016 revenue decisions. The Tribunal conducted the merits review hearing in November 2016. The Tribunal has extended the time to make its determination in relation to these reviews until August 2017. Judicial review of these decisions was sought in addition to applications for merits review. The matter has been stayed pending completion of the Full Federal Court’s decision in relation to the AER’s application for judicial review of the Australian Competition Tribunal decisions.

Oversight of network regulation

The AER’s role in network regulation extends beyond making network decisions and approving access arrangements; we also have a wide range of broader regulatory oversight roles.

Tariff assessments and tariff structure statements

The AER conducts annual reviews of tariffs for electricity distribution services and gas pipeline charges to ensure that they do not breach revenue or pricing limits and that they reflect underlying costs.

In 2016–17 we reviewed and approved tariff applications from 14 electricity distribution businesses and 11 gas transmission and distribution businesses. The proposals related to prices applying in 2017–18. In Victoria the proposals apply in the 2017 calendar year.

In 2016–17 we commenced our new role in assessing tariff structure statements for electricity distribution network businesses. The statements provide for network tariffs that better reflect the costs of supplying electricity to consumers. Pricing reforms will provide better signals to consumers on the timing of their consumption and their investment in new appliances and technology. The reforms will also provide incentives for more efficient network investment. Approved tariff structure statements have been published for all distributors, apart from the Power and Water Corporation in the Northern Territory, which was not part of this first round of assessments. Power and Water’s tariff structure statement will be considered as part of its first revenue determination process under the national framework in 2018.

Cost pass-throughs

We assess applications by network businesses to pass through to customers costs arising from events outside their control that were not anticipated when their regulatory decisions were made.

Before approving a pass-through, we must consider the efficiency of the expenditure and actions to mitigate costs. In 2016–17 we approved cost pass-through applications for:

• Jemena to recoup unpaid distribution charges associated with a retailer insolvency event
• the return to customers of reductions in costs relating to ElectraNet providing network support
• AusNet Services to pay an annual easement land tax to the Victorian Government.

Incentive schemes

We operate incentive schemes for network businesses to improve their performance. We also administer the schemes and monitor compliance.

Electricity transmission incentives

The AER’s service target performance incentive scheme for electricity transmission networks encourages the network businesses to maintain or improve service reliability in a way that customers value. The scheme promotes network development that supports efficient wholesale electricity prices.

In March 2017 we completed our review of how the seven transmission networks in the national electricity market (NEM) performed against the scheme for the 2016 calendar year. The businesses received incentive rewards totalling $57 million.

An amended scheme will first apply to upcoming determinations for the Victorian and Queensland networks covering the period 2017–22.

Electricity distribution incentives

Our service target performance incentive scheme for electricity distribution networks encourages them to maintain or improve performance to benefit end users. It aims to ensure efficiencies are not achieved at the expense of service performance. We review businesses’ performance against the scheme annually.

In March 2017 we completed our review of how the 13 distribution networks in the NEM performed against the scheme for the 2016 financial year. The businesses received incentive rewards totalling around $33 million.

We also assess expenditure by distribution businesses under the demand management innovation allowance (DMIA). Victorian businesses report DMIA on a calendar year basis, while non-Victorian businesses report on a financial year basis. For the 2015–16 and 2016 reporting year, the businesses claimed $6 million expenditure on DMIA in total. This represents 16 per cent of the total innovation allowance available under the scheme.

Victorian fire reduction incentives

The AER administers the f-factor scheme—a scheme introduced by the Victorian Government to provide incentives for Victorian distribution networks to reduce the risk of fire starts from electricity infrastructure and to reduce the risk of loss or damage caused by fire starts.

All Victorian distribution network service providers reported better results (fewer fire starts) than the relevant benchmark targets in 2016. The rewards ranged from $70 000 for Jemena to $3.42 million for AusNet Services in this period. The total of rewards to all distributors was $5.875 million for their 2016 results.

A new scheme was introduced by the Victorian Government in December 2016. Under this new scheme, each fire start will be weighted by a ‘geography factor’ and a ‘time factor (fire risk)’. The risk factor of each fire start—known as ignition risk units (IRU)—will be determined by applying these two weighting factors. The overall IRU scores for all fire starts within a financial year will be measured against the benchmark IRU target. This will be applied after 2018.

Complaints and dispute resolution

A customer who is dissatisfied with a connection offer from a distribution network business may request a review by the AER. In 2016–17 we received requests relating to 10 electricity connection disputes, of which nine were resolved and one is still under investigation. The connection charges of four customers were substantially reduced.

We also investigate customer and stakeholder complaints and advise the complainants of our findings. If we find that a distribution business has breached its regulatory obligations, we use our enforcement powers to ensure future compliance.

Performance reporting

The AER uses regulatory information notices to collect performance information from regulated network businesses. To support transparency and ensure stakeholders can access information affecting their interests, we publish the non-confidential information we receive.

In 2016–17 we published data on the operational and financial performance of electricity distribution networks in New South Wales, Queensland, South Australia, Tasmania, Victoria and the ACT for 2015–16.

In November 2016 we released our annual benchmarking reports for electricity network businesses on their relative efficiency over 2006–15. We also published economic benchmarking and category analysis regulatory information notice responses from the businesses for 2015–16.

Policy input

We engage in policy reviews and rule changes relating to our network regulation role. We made submissions to a number of Australian Energy Market Commission (AEMC) and Council of Australian Governments (COAG) Energy Council policy reviews and rule change processes in 2016–17, including on:

• the Victorian declared wholesale gas market
• the information disclosure and arbitration framework
• an independent review of the future security of the national electricity market (preliminary report)
• the contestability of energy services (consultation paper)
• replacement expenditure planning arrangements (consultation paper)
• the distribution market model (approach paper)
• participant derogations for New South Wales and ACT distributor revenue smoothing
• improving accuracy of customer transfers (draft determination)
• the market participant suspension framework (draft determination)
• a review of limited merits review (consultation paper)
• a rate of return guideline review (consultation paper).

Network exemptions

The AER can exempt small electrical networks such as those in apartment buildings, shopping centres and industrial parks from registering with the Australian Energy Market Operator (AEMO). These networks, often referred to as ‘embedded networks’, are subject to a simplified regulation regime administered by the AER, covering safety, metering, dispute resolution, network charging and access to retail competition.

Anyone who owns, operates or controls a small network can register as an exempt network service provider. We maintain a register on our website of the holders of network exemptions. Since commencing the register in 2012 we have processed around 3200 registrations.

On 1 December 2016 we published a revised version of the Network service provider registration exemption guidelines as part of the Power of Choice reforms. The changes to the guideline addressed such issues as who must appoint and who must pay for the new embedded network manager accredited service provider. This new role is intended to increase retail competition for customers in embedded networks by accurately identifying and recording embedded network customers in wholesale market systems.

Network planning and expansion

We monitor and enforce the compliance of electricity network businesses in applying regulatory investment tests for proposed new investment. We also have a role in resolving disputes over how the tests are applied.

In June 2016 we submitted a rule change proposal to improve transparency in the planning of network replacement expenditure.

The impetus for the rule change proposal has been recent growth in replacement expenditure as a proportion of all network investment, and the increasing viability of non-network alternatives to like-for-like replacement. On 11 April 2017 the AEMC published a draft rule determination on the proposed rule change. The draft rule requires electricity network service providers to include information on all planned network asset retirements and certain de-ratings in their annual planning reports. It also extends the current regulatory investment test framework for electricity transmission and distribution networks to include replacement expenditure.

The AEMC is continuing its consultation on the proposed rule change. Its response to the draft rule determination is due in July 2017. We will continue to work with the AEMC to progress this rule change in 2017–18.