AER releases state distribution determinations, receives pricing proposals

The Australian Energy Regulator (AER) released its 2010–11 to 2014–15 distribution determination for Queensland and South Australia in May. It also received pricing proposals from ActewAGL and the NSW distribution network service providers (DNSPs), Country Energy, Energy Australia and Integral Energy, for the regulatory year 2010–11.

After considering the Queensland DNSPs’ revised regulatory proposals against the capital expenditure NER’s criteria, the AER concluded that Energex and Ergon Energy’s proposed capital expenditure was $321 million and $1452 million respectively higher than an efficient level. The AER’s determination results in a 4.8 per cent and a 20.7 per cent reduction in the capital expenditure proposed by Energex and Ergon Energy respectively. Energex’s nominal total revenue for the next regulatory control period is $7011 million while Ergon Energy’s is $6554 million. Energex’s allowed revenues will increase in nominal terms by 21.2 per cent in 2010–11 compared to the preceding year. Ergon Energy’s allowed revenues will increase in nominal terms by 32.9 per cent compared to the preceding year. For the remaining four years of the regulatory period, Energex and Ergon Energy’s revenues will increase in nominal terms by 10.6 and 7.7 per cent per annum respectively.

Based on a typical residential customer’s annual retail electricity charges of $1400 in 2009–10, that customer can expect to pay just over 9.2 per cent, or around $129 in total, more in these charges in 2010–11. Beyond 2010–11, further retail price rises for residential customers will be around 2.3 per cent or $35 each year.

South Australia distribution determination gave ETSA Utilities a $3525 million (nominal) total revenue for the 2010–15 regulatory control period. The AER accepted ETSA Utilities’ maximum demand forecasts included in the revised regulatory proposal but was not satisfied that the energy sales forecast provides a realistic expectation of the demand forecast required to achieve the capital and operating expenditure objectives.

According to the AER, in South Australia the need to ensure that the network can withstand customer demands at peak times is contributing to the increase in network costs, driven predominantly by the use of air conditioners during summer heatwaves. This is despite customers consuming less energy, on average, as a result of a number of energy efficiency programs and increased penetration of photovoltaic systems.

According to the Energy Users Association of Australia (EUAA), Queensland and South Australia are expected to have significant increases in network prices from 1 July in the range of 30 to 50 per cent in Queensland and around 13 per cent in South Australia, with Victoria’s price review to occur later in the year. Electricity prices in New South Wales will increase by 20 per cent in July.

In its April pricing proposal, Energy Australia states domestic customers who have signed up to its dynamic tariffs have responded well and are willing to reduce their air conditioning usage on hot days, despite popular belief to the contrary. The proposal states the dynamic price could probably be set at 50/70c/kWh and still achieve comparable reductions and the demand response to prices above $1/kWh appears to be saturated.

According to the Energy Supply Association of Australia (esaa), claims by the Queensland Opposition that privatisation of the state’s electricity companies has resulted in bad price outcomes are incorrect.

“Rising energy prices are no mystery. A big increase in population and rising energy demand is driving a need for new connections at a rate never before seen, and the cost of meeting this has been exacerbated by the need for upgrades to ageing network facilities,” esaa chief executive officer, Brad Page said.

“Investing in networks is expensive but necessary to make sure the community and industry has reliable and secure power supplies to keep our economy working,” Mr Page said.

In August the RIT-T will replace the existing regulatory test for electricity transmission investments. The existing regulatory test will continue to apply to projects which address a need on the distribution network.

The RIT-T is to identify the transmission investment option which maximises net economic benefits and, where applicable, meets the relevant jurisdictional or National Electricity Rule based reliability standards. The RIT-T will provide a single framework for all transmission investments and remove the distinction in the regulatory test between reliability driven projects and projects motivated by the delivery of market benefits.

According to AER’s March explanatory statement, the amalgamation of the reliability and market benefits limbs of the regulatory test will or is likely to optimise the decision making process in relation to transmission planning by promoting dynamic and allocative efficiency. By including the assessment of market benefits, the RIT-T should promote more efficient investment over time.

Over $42 billion of capital expenditure has been approved by energy regulators over the next five years. Meeting in December 2009, Australia’s Ministerial Council on Energy noted that price rises are expected to occur in coming years due to required investments to meet the challenges of ageing infrastructure, growing demand and policies to reduce greenhouse gas emissions. According to the Energy Networks Association, the expenditure recognises a need to renew what are typically ageing networks, meet higher peak network demand from the growing penetration of a variety of gas and electric household applications, and sustain or improve overall network reliability.

“Network charges have also been affected by the increasing cost of sourcing longer-term financing arising from the Global Financial Crisis—for example the debt risk premium (the assessed cost of debt margin over long-term government bond rates) has more than tripled over the past five years,” the ENA said in a March energy statement.

“Finally, network costs have also been under pressure by the need to compete for technical and engineering staff with the still-expanding resources sector in a relatively tight labour market.”

The EUAA said it was concerned how the “parade of energy price increases” will affect business.

“How can Australian businesses trying to succeed in this country or make it in world markets swallow electricity price increases of such magnitude?” EUAA executive director, Roman Domanski said.

Speaking at the Energy Pricing Roadshow in April, Energy Advisory Services director, Matthew Rennie said DNSPs are incentivised to build capex and the current level of investment in the network probably isn’t sustainable.

“AER needs to encourage and incentivise distributors to target demand side as an alternative investment,” Mr Rennie said.

“Who is going to make the decision that we don’t need more capex?” he said.