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Focus: Senate Select Committee on Electricity prices report released

21 November 2012

In brief: The Senate Select Committee on Electricity Prices has released its report, which lays out a series of recommendations, findings and comments in relation to rising electricity prices in Australia and the current electricity regulatory framework in the National Electricity Market. Partner Grant Anderson and Law Graduate Albert Yu report.

How does it affect you?

  • The Senate Select Committee on Electricity Prices (the Committee) has found that over-investment in network infrastructure, which it identified as a significant contributor to rising electricity prices in Australia, is not only permitted but incentivised by the current regulatory framework in the National Electricity Market (NEM).
  • The Committee has therefore recommended a series of amendments to the National Electricity Law (NEL) and National Electricity Rules (NER), as well as an expanded role for the Australian Energy Regulator (AER) and the Australian Energy Market Operator (AEMO), to address the causes of rising electricity prices.
  • The Committee has also made recommendations that are designed to encourage and facilitate demand management and embedded generation, such as solar photovoltaic panels, in order to mitigate future electricity price increases.
  • Other Committee recommendations include that the National Energy Customer Framework (NECF) be implemented in all states and territories in the NEM on or before 1 July 2013 and the establishment of a national consumer advocacy body for the NEM.

Background

The causes of rising electricity prices in the NEM, particularly the alleged over-investment in network assets or 'gold-plating', have been the subject of much public debate in recent times. Largely as a response to these concerns, the Committee was established on 23 August 2012, with broad terms of reference to conduct an inquiry into, and provide a report on, a range of issues in relation to the electricity market.1 The Committee was chaired by Senator Matt Thistlethwaite and received 113 submissions from the public. It held five public hearings from late September to early October 2012.

On 1 November 2012, the Committee released its report, entitled Reducing energy bills and improving efficiency (the Report). The Report's findings and recommendations relate primarily to:

  • price setting and the causes of electricity price increases in the NEM;
  • the regulation of the NEM;
  • demand management and ways in which consumers can reduce their electricity consumption; and
  • consumer protections in the NEM.

The Committee's recommendations, findings and comments are discussed below.

Price setting and causes of electricity price increases in the NEM

The Committee found that the following factors contributed significantly to household electricity price rises:

  • the need to service peak demand;
  • excessive demand forecasts and the gold-plating of networks;
  • opportunistic profit taking and dividend extraction by state governments;
  • revenue caps that cause prices to rise when demand falls, and hedging arrangements that mitigate downward price movement in the NEM;
  • labour practices;
  • the greater use of underground cabling;
  • the replacement of assets after their useful life;
  • a lack of competition in some retail sectors; and
  • the unwinding of cross subsidies between business and household customers.

In light of these findings, the Committee recommended that:

  • the AER should provide an annual report that includes a detailed quantitative analysis of the components of, and contributors to, electricity prices; and
  • ongoing arrangements should be put in place to scrutinise more effectively prices in the overall electricity system, and ensure that price setting for individual components and factors is done in the context of keeping overall electricity prices at a 'more acceptable level'.

Regulation of the NEM

Infrastructure over-investment and electricity prices

The Committee found that, while electricity network infrastructure is a long-lived capital asset that requires maintenance and upgrading, the current regulatory framework in the NEM (which primarily consists of the NEL and the NER) not only permits but incentivises over-investment in network infrastructure. It identified two major incentives to over-invest: the guaranteed rate of return permitted for network service providers (NSPs), and unnecessarily high reliability standards. The Committee found that the current regulatory framework guarantees a rate of return for NSPs for a regulatory control period (which must be at least five years), so that if demand falls, prices must be increased to ensure that the NSPs are able to earn this guaranteed rate of return. The Committee also endorsed the view that reliability standards should be balanced against providing electricity to consumers at affordable prices, and that these standards tended to be set without considering consumers' interests.

As a result of these findings, the Committee recommended that:

  • the rates of return for NSPs should be estimated using a robust process based on guidelines developed and reviewed every three years in consultation with stakeholders;
  • the AER should be required to consider total forecast expenditure when making network determinations;
  • the Standing Council on Energy and Resources (the SCER) should direct the Australian Energy Market Commission (the AEMC) to examine arrangements for AEMO to be the single planning agency for the NEM, with responsibility for forecasting, network planning, national reliability standards and undertaking an integrated assessment of network and non-network options;
  • the AEMC should set, and AEMO should implement, national reliability standards that take into account consumers' perceived value of reliability and that are developed independently of the businesses that derive income from network infrastructure; and
  • the NER should be amended to empower the AER to conduct ex post reviews of capital expenditure by NSPs, so as to provide an appropriate balance between providing investment certainty for NSPs and providing incentives to invest efficiently.

In fact, the first two recommendations have already been addressed, through rule changes that have recently been published, and that were under development well before the Committee was established.

The Committee also expressed concern that operating profit before tax in the electricity industry increased by 67 per cent from 2007-08 to 2010-11, while electricity prices rose by more than 40 per cent. It consequently recommended that:

  • the NER should be amended so that greater guidance is provided on how network businesses should set their tariffs to reflect costs; and
  • the AER should implement measures to decouple network revenues and energy volumes.
Other recommendations and findings in relation to the regulation of the NEM

The Committee recommended that the AER receive additional funding, expertise and accountability, and that the AEMC should consider how broader environmental considerations could better align with the operation and regulation of the NEM (it noted that the national electricity objective does not currently refer to environmental considerations).

In addition, the Committee expressed concern that it was too easy for NSPs to challenge the AER's revenue and price determinations for network businesses, that NSPs frequently did so, and NSPs were (more often than not) successful in having the AER's decisions overturned. The Committee accordingly welcomed the SCER expert panel's Stage Two report on the review of the limited merits review regime, as addressing these concerns.

Demand management and ways in which consumers can reduce electricity consumption

The Committee found that the costs associated with network infrastructure that is needed to meet increasing peak demand were one of the most significant drivers of recent electricity price increases. It therefore recommended that the SCER should agree to introduce cost reflective pricing for electricity in conjunction with smart meters in all jurisdictions in the NEM.

The Committee also supported the introduction of a demand response mechanism to allow consumers to sell their demand in the wholesale electricity market for the prevailing spot price. However, it was concerned to ensure that where third parties sell demand in the wholesale market on behalf of consumers, those third parties are accredited, authorised to act on behalf of the relevant consumers and are required to act in the interests of those consumers. Accordingly, the Committee recommended that the SCER should examine incorporating the accreditation and regulation of third parties offering demand management services into the NECF.

Further, to encourage embedded generation (such as solar photovoltaic panels) in the NEM, the Committee recommended that the SCER should:

  • examine barriers to embedded generation, particularly those related to network design, connection and costs, as well as feed-in tariff payments;
  • empower relevant state and territory ombudsmen and/or tribunals to intervene where embedded generators and NSPs are unable to resolve disputes;
  • standardise connection processes for embedded generation in the NEM, and establish a requirement for a standard connection protocol and licensing regime for embedded generation within the NEM;
  • direct the AEMC to develop a rule change requiring NSPs to release annual maps of network constraints and their value;
  • direct the AEMC to develop a rule change to establish a default system of location-specific network support payments for embedded generation;
  • direct the AEMC to review the NER so that network charges for embedded generators reflect the cost of using only the relevant section of the network; and
  • direct the AEMC to implement changes to the regulatory framework in order to provide incentives for generators to build in locations where the costs associated with transmission are reduced.

In addition, the Committee recommended that the AEMC should investigate ways in which greater transparency can be introduced into negotiations between transmission businesses and generators. This was in response to concerns raised by the Clean Energy Council regarding the information disadvantage of generators compared with transmission companies.

Consumer protections in the NEM

According to the Committee, the NECF provides energy consumers with valuable protections while simultaneously providing benefits to electricity retailers by removing duplicative red tape. It therefore recommended that the NECF should be implemented in all states and territories in the NEM, in a way that does not detract from existing consumer protections, on or before 1 July 2013. The current status of NECF implementation is as follows:

  • the NECF has been implemented in the Australian Capital Territory and Tasmania (for residential and small business electricity customers) on 1 July 2012.
  • New South Wales, Victoria and South Australia remain committed to commencing the NECF as soon as practicable and no later than 1 January 2014, providing outstanding issues are resolved, with New South Wales aiming for a start date of 1 July 2013; and
  • Queensland is yet to consider its position on the application of the NECF.

The Committee also recommended that the SCER should consider establishing a national consumer advocacy body to represent and support consumers in the NEM.

Next steps

As noted in the Report, there are a number of other reviews of the electricity market currently underway or recently completed, including the Productivity Commission's review of the electricity network regulatory frameworks, various reviews by the AEMC, and the SCER expert panel review of the limited merits review regime. It seems that many of the Report's key recommendations simply adopt the reforms recommended by these reviews, rather than add much that is new by way of independent analysis.

Footnotes
  1. Journals of the Senate, 23 August 2012, pp 2873–2874.

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