NER’s first revenue determination cycle in review

The Australian Energy Regulator (AER) has nearly concluded its first cycle of revenue or price determinations for electricity distribution networks under the National Electricity Rules (NER). The cycle will be completed with the Tasmanian business Aurora Energy, which submitted its proposal in May 2011.

The AER has also completed its first cycle of determinations for transmission networks (apart from the Murraylink and Directlink interconnectors) under the current rules.

The AER is using this opportunity to take stock of its experiences with the regulatory regime and review whether any changes would better meet the regime’s underlying objective to promote efficient investment in and use of electricity services for the long-term interests of energy consumers.

The AER commenced a review in early 2011 focused on the regulatory framework set out in chapters six and 6A of the National Electricity Rules. The AER is also considering ways to enhance efficiency incentives for network businesses and improve the administrative efficiency of the regulatory decision making process.

In July the AER released its Strategic Priorities and Work Program for 2011-12 report. The document sets out the AER’s objectives and values and highlights five strategic priorities for 2011-12.

From this review, the AER has identified changes to the rules that they consider would better protect consumers from paying more than they should for the safe and reliable supply of electricity.

“We will be proposing rule changes to the Australian Energy Market Commission (AEMC) in the third quarter of 2011. This timing is to ensure that any amendments to the framework are in place for the next round of revenue or price determinations (starting with the New South Wales and ACT networks),” the report states.

The rule change proposal will focus on how the regulator can ensure that the allowances for the businesses are no more than necessary, reflecting an unbiased estimate of efficient costs. Further, the AER is examining ways to ensure that businesses are not rewarded for unnecessary and excessive overspends.

The report states it is also necessary to reform the process for deciding the businesses’ allowable returns. The AER is proposing to replace the various processes currently used across electricity and gas transmission and distribution networks with a single consistent framework. Changes are needed to ensure that returns are consistent with current commercial practices and financing costs.

Complementing its review of the regulatory framework, the AER is undertaking a review of its information collection, analysis and reporting processes that inform revenue and price determinations. Considering these processes together will ensure that the type and quality of information collected reflects the AER’s choice of analytical tools and allows for effective assessment of business performance.

The AER is aiming to implement its amended processes to allow for the collection of robust and consistent data across the businesses it regulates by June 2013.

In light of the AEMC’s current review of electricity transmission frameworks, the AER will also review specific regulatory arrangements for transmission services, including the service target performance incentive scheme and arrangements for connecting to the transmission network.

To achieve the objectives of the energy market legislation, the AER aims to ensure wholesale energy markets operate competitively, and that electricity generators and gas producers do not use market power to drive prices above competitive levels.

In 2011-12 the AER is participating in consultation by the AEMC on a rule change proposal in relation to the potential exercise of market power by generators in the National Electricity Market (NEM).


Retail reform

The AER will continue preparing for national regulation of retail energy markets, which in 2012 will see the AER take on significant new regulatory roles.

“Our focus in this area is to ensure energy consumers are adequately protected and encouraged to engage in the market. For example, we will ensure consumers can access information on retail prices and their rights and options in relation to such matters as retailer switching, hardship issues, door to door selling and what to do if their retailer fails,” the AER states in its Strategic Priorities and Work Program for 2011-12 report.

The AER aims to establish its reputation as the incoming regulator and build on productive and co-operative relationships with regulated businesses, customer groups, energy ombudsman schemes, industry associations and other stakeholders.

“In 2011-12 we will finalise guidelines and procedures explaining our approach to retail regulation, including in areas such as customer hardship policy approval, compliance monitoring, performance reporting and retailer of last- resort arrangements,” the report states.

With upward pressure on retail energy prices is causing considerable concern among energy customers, the AER is also focused on enhancing customer understanding of energy prices.

“While the AER has (and will have) no regulatory control of wholesale or retail energy prices, we are looking at ways of making energy price information more transparent and comparable to help customers make informed choices when choosing an energy supplier,” the report states.

In 2011-12 the AER will develop a retail price comparator website (to be launched in July 2012) to assist consumers; finalise a guideline on how energy retailers must present their prices in a retail offer; develop indicators of energy affordability that will form a basis for future performance reporting arrangements; and continue to publish clear, accessible and relevant information on energy market activity and outcomes.

New-look AER

The AER has plans underway to update its communications with industry and customers.

The regulator expects to launch a newsletter in 2011-12 to enhance their communication with stakeholders. The newsletter is expected to become an increasingly important means of updating stakeholders during the transition to national regulation of retail energy markets.

In 2011-12 the AER intends to complete a website redesign to make it more user-friendly. The new website will have particular regard to its interface with energy customers.

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