Regulator makes ruling on network incentive scheme

Transmission towers against hazy green sky (incentive)
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The Australian Energy Regulator (AER) has published its final decision on the review of the incentive schemes it applies to network service providers.

The review found incentive schemes have improved network efficiency, reduced costs, and, with some refinements, stand to benefit energy consumers even further.

The review is part of a broader work program aimed at improving expenditure forecasts and consumer outcomes, including the Better Resets Handbook, refinements to our benchmarking approach and forecasting toolkit, and our new network performance reports.

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AER chair Clare Savage said Australia’s incentive-based regulatory framework is an important part of ensuring better long-term outcomes for energy consumers.

“Consumers have benefited significantly from the incentive-based regulatory framework, with reductions in network expenditures and revenues over time.

“While benefits have already been realised, we are consistently assessing how our regulatory regime is performing in delivering outcomes that are in the long-term interest of consumers and we continue to look for areas of improvement,” Savage said.

“The AER’s review of regulated network incentive schemes found that operating expenditure of Australia’s energy network businesses is 30% lower today than it was 10 years ago, and capital expenditure is 50% lower, contributing to significant reductions in network charges,” Savage said.

“At the same time, service standards have improved, with the frequency and duration of outages at a record low.

“While network service providers are rewarded for efficiency gains the majority of benefits have been passed on to consumers.

“That’s why we’re planning to retain the schemes, with some modifications, to further improve network efficiency and allow consumers to better scrutinise network revenue proposals.

“Our decision reduces the rewards to networks when expenditure outperformance is high, so that the penalties to networks can be higher than the rewards. This asymmetry will reduce the costs of the Capital Expenditure Sharing Scheme to consumers while maintaining strong incentives for efficiency,” Savage said.

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The final decision:

  • Varies the Capital Expenditure Sharing Scheme (CESS). The CESS provides incentives to improve efficiency by rewarding networks when expenditure is lower than forecast and penalising them when expenditure is higher than forecast.
  • Retains the Efficiency Benefit Sharing Scheme (EBSS).
  • Improves transparency by requiring networks to explain differences between approved expenditure forecasts and actual expenditures.
  • Commits to a review of the Market Impact Component of the transmission Service Target Performance Incentive Scheme (STPIS).
  • Commits to review benchmarking performance targets to more closely align the performance of networks with their most efficient counterparts.

The final decision was informed by stakeholder submissions and the AER’s 2013 Capital Expenditure Incentive Guideline has been updated to implement our final decision.

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