Regulators poles apart on network rules

The diverging application of new national energy rules has demonstrated the need for a truly national energy regulator with responsibility for all jurisdictions, according to the Energy Networks Association (ENA).

The association has stated critical differences between two proposed ‘rate of return’ guidelines – issued by two regulators, under the same framework, at the same time – highlights the need for a consolidation in Australia’s network regulation.

ENA chief executive officer John Bradley said after two years of regulatory policy review, the same rules for setting the allowed rate of return for energy network businesses are being interpreted in two sharply different ways by energy regulators. As such, energy investors and customers are being denied certainty and flow-on benefits.

“After extensive consultation, the Australian Energy Market Commission (AEMC) has imposed new requirements on economic regulators setting rate of return allowances under the National Gas Rules and the National Electricity Rules,” he said.

“Both the AER (Australian Energy Regulator) and the ERA (Economic Regulation Authority) have now issued draft guidelines for calculating the rate of return under the same rules. Each regulator’s guideline takes a different approach to the cost of equity and debt.

“Energy networks welcomed the AEMC rule change because it provided for robust consideration of all relevant financial models and evidence, better transparency and predictability of rates of return for investors in long-life capital and reduced volatility for consumers. This represented a key advance over the flawed reliance on a single approach that is currently used.”

According to ENA, the AER draft guideline represents an improvement on their current approach, but does not provide clarity about how evidence from other financial models will used.

“The WA ERA draft guideline does not appear consistent with the new national gas rules on cost of equity. Its draft guideline effectively rejects the use of alternative financial models upfront and proposes to ignore them in decision-making,” Mr Bradley said.

Mr Bradley also said the different interpretations of the rules do not support investors’ need for regulatory certainty.

“Now is the time for the federal and state governments to consider the scope to establish a truly national economic regulator of networks by expanding the jurisdiction of the Australian Energy Regulator,” he said.

“This has the benefit of promoting clearer regulatory practice and investment certainty and removes the risks of parochial influence on economic regulatory decisions which should be evidence-based and empirical.”

The federal coalition has indicated its intention separate the AER from the ACCC, a move Mr Bradley said should go further; working with the Western Australian Government to progress an orderly transfer of responsibility from the ERA to the AER.