Regulator reductions threaten network operations and service delivery

Regulator reductions threaten network operations and service delivery

Unsustainable funding cuts to electricity networks proposed by the Australian Energy Regulator (AER) threaten to undermine reliability, safety and efficiency outcomes for customers, according to the Energy Networks Association (ENA).

The AER has proposed reductions to current operating expenditures totalling $2.7 billion or 35 per cent in the next five years for electricity transmission and distribution network businesses in New South Wales and the Australian Capital Territory.

The network sector recognised the price pressures on electricity customers and the need to deliver cost savings and efficient performance, according to ENA CEO John Bradley, but said industry needs to avoid impacts on other customer priorities.

“In NSW and ACT, the AER would cut distribution operating expenditure to a level not seen in 10 to 13 years – it seems implausible that this can be achieved without customer impacts. If implemented, these funding cuts put at risk key consumer outcomes relating to safety, maintenance and outage response times,” he said.

“While consumers should expect a strong regulatory regime, which drives real efficiency benefits, unsustainable funding cuts would inevitably be service reductions in disguise.

“It would be a high-risk approach to an essential service.”

Mr Bradley said the draft decisions threaten to change the risk profile of network operations and service delivery, and deliver short-term price reductions at the expense of ongoing service outcomes for consumers.

“In some distribution businesses, the proposed decision would require the removal of thousands of staff, less vegetation management, slower responses to outages and less frequent inspections and maintenance,” he said.

“The AER is not a technical or safety regulator and it’s not clear the due diligence has been done to assure consumers that network safety, public safety, outage response times and customer service will be maintained.”

Mr Bradley said the effect of operating expenditure cuts would be greater for distribution businesses where staff redundancies are required and effectively backdated. In one case, this could mean an effective operating expenditure reduction of 60 per cent below the regulatory proposal in the four years from July 1, 2015.

“These are the first draft decisions under a new regulatory framework using a new benchmarking technique so it is important not to lose sight of the potential customer impacts,” he said.

Under the National Electricity Rules, the AER was required to release its first-ever annual benchmarking report for the Australian distribution industry on September 30, 2014, so it would be available well before the first draft determination.

“The benchmarking analysis has only been released publicly now and seems to have been applied as a blunt tool to support retrospective cuts of up to 42 per cent in distribution operating expenditure,” Mr Bradley said.

The ENA and its members have sought urgent briefing with the AER to discuss concerns about the outputs and use of the benchmarking analysis.

“Benchmarking should not be used simplistically and the AER consultant report rightly notes the Australian data alone produced model estimates that are “relatively unstable and unreliable’,” Mr Bradley said.

“Australian energy consumers rely on future investment to ensure new customers can be connected and assets can be replaced to maintain security and reliability.

“We have seen underinvestment in reliability in some states result in rushed and heavy-handed interventions by State governments mandating expensive reliability standards. Consumers end up paying more under this kind of ‘roller-coaster’ regulation where under-spending is followed by higher cost catch-up spending and political intervention.”