Regulation of the electricity market
As discussed in Chapters 2 and 3, regulation and oversight of the
electricity industry in Australia is complex. Electricity markets are overseen
by governments and operated and regulated by independent bodies funded from a
mix of government and industry investment. Independent regulators are required
to oversee the operation of the wholesale market, generators, network
businesses and retailers.
The overarching responsibility for energy policy in Australia rests with
the Standing Council for Energy and Resources (SCER). SCER is responsible to
the Council of Australian Governments (COAG) and sets the general principles
relating to national energy regulation.
Under the Australian Energy Market Agreement (AEMA) signed by the
Commonwealth, state and territory governments in 2004, SCER also has general
policy oversight of some relevant national energy legislative arrangements
including the National Electricity Laws and Rules.
The National Electricity Law (NEL) is the foundation for the National
Electricity Market (NEM) and establishes that all significant electricity
industry participants in each relevant jurisdiction are required to participate
in the single electricity market.
The law also sets out the National Electricity Objective (NEO) and revenue and
The National Electricity Rules (NER) govern the operation of the NEM.
The rules have the force of law and are created by the NEL. The rules provide
for the economic regulation of electricity distribution in relevant
Economic regulation of electricity networks
Electricity networks transport power from generators to customers.
Transmission networks transport power over long distances, linking generators
with load centres. Distribution networks transport electricity from points
along the transmission network, and criss-cross urban and regional areas to
provide electricity to customers.
Energy networks are capital intensive and incur declining average costs
as output increases or increasing average costs as output decreases. This means
network services in a particular geographic area can be most efficiently served
by a single supplier, leading to a natural monopoly industry structure.
It is for this reason that electricity networks are subject to economic
regulation: the Australian Energy Regulator (AER) has responsibility for
monitoring and regulating networks in the NEM while the Economic Regulation
Authority (ERA) regulates networks in Western Australia (see Chapter 2).
The NEM has 13 major electricity distribution networks. Queensland, New
South Wales (NSW) and Victoria having multiple networks that are monopoly
providers within designated areas. The Australian Capital Territory (ACT),
South Australia and Tasmania each have one major network. Western Australia has
three major networks.
The transmission networks in Victoria and South Australia, and the three
direct current network interconnectors between these two states are privately
owned. Victoria's five distribution networks are privately owned, while the
South Australian network is leased to private interests. The ACT distribution
network has joint government and private ownership. All networks in Queensland,
NSW and Tasmania are government controlled. The network in south west Western
Australia is government owned and two networks in the north west of the state
are privately owned.
The NEL lays the foundation for the regulatory framework governing
electricity networks. The law establishes revenue and pricing principles,
including that network businesses should have a reasonable opportunity to
recover 'at least efficient costs'.
In the NEM, regulated electricity network businesses must periodically
apply to the AER to assess their revenue requirements (typically every five
years). Chapters 6 and 6A of the NER lay out the framework that the AER
must apply when assessing the revenue of distribution and transmission
While the regulatory frameworks for transmission and distribution are
similar, there are differences. In transmission, the AER must determine a cap
on the maximum revenue that a network can earn during a regulatory period. The
range of mechanisms is wider in distribution, but generally involves setting a
ceiling on the revenues or prices that a network can earn or charge during a
The available methods to regulate revenue include:
- weighted average pricing caps—these allow flexibility in
individual tariffs within an overall ceiling (used in the NSW, Victorian and
South Australian networks); and
- average or maximum revenue caps—these set a ceiling on revenue
that may be recovered during a regulatory period (used in Queensland, the ACT
and Tasmanian networks).
For either method, the AER must forecast the revenue requirement of a
business to cover its efficient costs and provide a commercial return. The AER
uses a building block model that accounts for a network's efficient operating
and maintenance expenditure, capital expenditure, asset depreciation costs and
taxation liabilities, as well as commercial return on capital.
Under the NEL, network businesses can apply to the Australian
Competition Tribunal for review of an AER determination (a limited merits review).
The mechanism was introduced on 1 January 2008 and its purpose is to provide
parties affected by the decisions of the energy regulator—primarily
transmission and distribution network businesses—with appropriate recourse to a
review mechanism. There are limits placed on this mechanism, aimed at avoiding
revisiting decisions which have been reached after extensive consultative
processes, and minimising uncertainty.
Of 72 matters that have been taken to the Tribunal by network service
providers since 2008, network businesses were successful in 58 per cent of
matters raised. In approximately 26 per cent of matters, the original decision
was affirmed. The Tribunal’s decision to remit matters to the regulator for
re-determination affected approximately 10 per cent of matters raised.
Criticisms of the current regulatory system
As detailed in Chapter 3, a large portion of recent electricity price
increases have been attributed to rising costs in network services. A widely
held view amongst submitters and witnesses was that regulatory failings have
allowed network costs to increase and to be passed on to consumers.
For example, the NSW Independent Pricing and Regulatory Tribunal
(IPART), which is responsible for regulating electricity retail prices for
small consumers in NSW, informed the committee that it:
...consider[s] that recent network cost increases, which are
responsible for most of the recent retail price increases, may be higher than
necessary due to aspects of the regulatory framework which are contributing to
Similarly, the Consumer Action Law Centre (CALC) submitted that 'the
regulation of monopoly infrastructure and the limited ability of the regulatory
framework to limit ongoing prices' is one of the drivers for the ongoing price
Professor Ross Garnaut stressed that:
The big increases in Australian electricity prices began in
2006 with the establishment of a new price regulatory system. This new regulatory
system was the culmination of a structural change in the Australian electricity
market in which generation, high-voltage transmission, distribution to users
and retail sales to small users were placed under separate ownership and
The AER informed the committee that 'weaknesses in the regulatory
framework—that is, the rules that set out how the AER must regulate prices—have
led to price increases beyond what has been necessary for a safe and reliable
Perceived failures in the regulation of the NEM were a recurring theme
throughout the inquiry. In particular, incentives to over-invest in network
infrastructure, a lack of resources on behalf of the AER and the intent of the
National Electricity Objective (NEO) were key concerns. These are discussed
Incentives to over-invest in network infrastructure
The committee received lots of evidence that the current regulatory
framework creates incentives to over-invest in network infrastructure
(see also Chapter 3). Two major incentives to over-invest raised during the
course of the inquiry were the rates of return permitted for network service providers
(NSPs) and reliability standards.
Rates of return
Professor Garnaut identified what many considered to be a core problem:
Where we went wrong is: we adopted a rate-of-return
regulation of price, and the rate of return was set too high. A lot of work has
been done in economics dating back to a famous paper in the American
Economic Review in 1951 by Averch and Johnson, warning about rate-of-return
regulation and noting that if you set the rate of return too high you will get
wasteful overinvestment and a ratcheting-up of prices. It is that classic
problem that is at the core of the Australian electricity price increases of
the past half-dozen years.
Professor Garnaut continued:
It is basically a riskless rate of return; there is not even
exposure to the market, so that if demand falls, price is increased to make
sure that companies get their guaranteed rate of return. So, as the demand
price has fallen, prices have had to be increased even more than the otherwise
would have been. Of course, if price then goes up in response to demand falls,
then demand falls even more. A completely unsustainable situation can emerge
and I think that we are in that unsustainable situation now.
It was also argued by the CALC that the revenue generated by NSPs is
facilitated by the current regulatory framework:
At the network level, which is monopoly regulated, price
increases are driven by not only a need for new investment to replace the
ageing infrastructure and the well-documented peak demand problem but also the
regulatory system itself which has been shown to have a limited ability to
limit ongoing cost increases and may actually encourage the building of assets
where cheaper options are possible.
Mr Bruce Mountain submitted that the existing regulatory environment is
not working and some significant changes are required.
Mr Mountain argued that consideration needs to be given to the ownership structure
of network businesses and the continued application of five year price controls.
He further claimed that:
Institutional arrangements also merit review. Candid
consideration of the political economy of economic regulation by a federal
agency, of the income and profits of state government owned service providers
Network businesses strongly refuted claims that their rates of return
were inefficient or unreasonable.
They opined that the current regulatory regime does not encourage over-investment
and instead rewards efficient and effective investment:
...I believe that the regulatory regime at present provides
incentives for businesses to defer capital expenditure rather than to
over-invest. In fact, the transmission businesses have been actively seeking to
defer investments. I give two examples here. Powerlink in Queensland had
diverted construction of its first 500kV circuit by a period of four years.
That is around $380 million to $420 million of expenditure. TransGrid New South
Wales has sought to defer projects. A major supply project to the west of
Sydney was deferred for a year from 2009. We are currently building a project
in Western Sydney which we have pushed back through contracting demand-side
support for it, and we have also just recently reviewed two major commission
line projects in the far north of the state and on the mid-north coast. We are
seeking to defer both of those projects for a number of years. I would suggest
that the incentive regime encouraged commercially-focused businesses to not
build capital expenditure, and the evidence points to that being a fact.
Grid Australia, the peak body representing the owners of all major
electricity transmission networks in the NEM and in Western Australia, argued
that the current incentive-based approach to regulation developed over the past
15 years is sound policy.
According to Grid Australia, the current rules 'largely get the balance right'.
Similarly, the Energy Networks Association (ENA), the peak body
representing network businesses, argued that the current system does not allow
for wasteful investment:
...there is a decision made by the regulator about what is an
appropriate level of capital expenditure to make over a five-year regulatory
cycle. The capital budget and the operating budgets are approved by the
regulator in advance on the basis of forecasts. There is not a capacity to
simply invent projects. All the proposals are backed by a solid business case.
They are assessed by the regulator and the regulator has on all occasions
reduced those bids to what they think is the appropriate level. Sometimes those
reductions in the capex budget have been significant; sometimes they have been
as high as 30 or 40 per cent on the basis of the regulator's best judgement
about what the appropriate capital expenditure is.
The ENA also argued that government policy should concentrate on the real
causes for higher network costs rather than crudely imposing more regulation on
The ENA argued that changes to the whole electricity industry are needed to
stem increasing electricity costs. According the ENA:
Governments have baulked at introducing the retail price
reforms essential to curbing the growth of peak demand. Mandatory reliability
standards have succeeded in improving service delivery to customers but
arguably at a cost which sections of the community now find difficult to
absorb. The roll out of smart meters, so important to empowering customers, has
stopped at the Victorian border. The regulatory system does not provide the
commercial incentives necessary to accelerate demand side participation.
Both the Australian Energy Market Commission (AEMC) and AER believed
that the current regulatory framework incentivises over-investment because of
the relationship between consumption volumes and profits, and the potential for
over recovery of revenue. In the Power of Choice draft report (PoC
report), the AEMC noted that:
[W]hen a network business develops tariffs which are based on
consumption volumes, its profits could depend upon the level of actual volumes.
Under such a tariff structure, the business would have no incentive to pursue
any form of DSP project (or energy efficiency project) which decreases volumes.
Analysis by the AER indicates that there is the potential for
substantial over recovery of revenue:
In the Victorian 2006–10 regulatory control period, the AER
asserted there was over recovery of revenue of $568 million (in 2010 values)
above the adjusted forecast. This represents an over recovery of revenue of
8.28 per cent annually for each distribution business.
Reliability standards were another commonly cited defence for
In response to claims that NSPs are the 'villains of the industry' who
gold-plate and profiteer, Mr Peter McIntyre, Chairman of Grid Australia,
I would ask on what basis they make that assertion. At a
transmission level, our network in this country is built consistent with the
standards that apply in almost all First World countries. The reliability you
get in Australia is consistent with what you would get and expect in Japan,
England, America or any other First World country. I do not regard that as
gold-plated at all. In fact, the regulatory regime requires us to demonstrate
that each investment is efficient at the time we make it, so in essence I do
not agree with that comment at all.
and Ergon Energy Corporation
argued that reliability standards had required network investment and thus had
a role in recent electricity price rises.
Other submitters and witnesses acknowledged the need for reliability while
emphasising that reliability standards must be set in the interests of
What we are really advocating is to also include reference to
affordable access in there, because, if we have the most efficient market, one
that is reliable, but people cannot afford to access it, we are not sure how
that is in the long-term interests of consumers.
The reliability standards set out in the network operators’
licence conditions reflect judgements made by Government (on the community’s
behalf) of the level of service (and the associated cost) valued by the
community. In determining these standards governments should consult with
electricity consumers—both business and residential customers—to understand the
different benefits they enjoy from a more reliable supply of electricity and
the extent they would be willing to pay for these benefits through higher
The Department of Resources, Energy and Tourism (DRET) advised the
committee that reliability standards are 'currently under examination by the
Australian Energy Market Commission' and that this process 'looked specifically
first at distribution standards within New South Wales, and it is now moving on
to consideration of national distribution reliability standards'.
Removing incentives to over-invest in network infrastructure
A variety of ways in which incentives to over-invest in network
infrastructure could be addressed have been suggested, during this inquiry and
elsewhere (such as the Power of Choice review and the Economic
Regulation of Network Service Providers rule change).
The Australian Energy Market Operator (AEMO) recommended that:
Regulatory arrangements should focus on rewarding businesses
for supplying services, focusing on providing returns for valued services and
not for the number of assets built. To complement a revenue-setting arrangement
that focuses more on rewarding businesses for the services provided, a planning
approach which considers the customer's value on the service provided from the
network investment would provide a better price-service balance.
Dr Paul Troughton of EnerNOC advised the committee that "a carrot
and stick" approach to regulation is needed, offering rewards where
network businesses make savings and creating disincentives when efficient investment
does not occur. Dr Troughton stated:
The networks have a strong preference for going out and
building infrastructure. Everyone recognises this, and we need some way of
fixing this. Basically, I think it means we need to have a more hands-on
regulatory approach. It has been very laid-back, "We'll trust that they
know what they're doing", a sort of broad-brush approach. It needs to be
more hands-on, it needs to have targets and it needs to have sticks and carrots
as well. The idea is that it should be self-evident to the network businesses...that
it is in their best interests to avoid doing capital works where it is more
efficient to do something else.
Whilst acknowledging that electricity network infrastructure is a
long-lived capital asset that requires maintenance and upgrading (particularly
as it ages), as well as the relationship between reliability standards and
network investment, the committee is swayed by the weight of evidence suggesting
that the current regulatory framework not only permits but incentivises inefficient
over-investment in network infrastructure. The committee considers that the
current regulations, particularly in regard to rates of return, have
substantially driven electricity prices directly and have effectively
"poured petrol" on other smouldering price pressures (see Chapter 3).
The committee is convinced that significant changes are required in
setting rates of return for network businesses. The committee therefore
recommends that the process for determining rates of return must be more robust
and based on guidelines developed and reviewed every three years in
consultation with stakeholders. The guidelines should include appropriate
frameworks for total expenditure (totex), capital expenditure (capex) and
operational expenditure (opex). The guidelines should also ensure that
frameworks for determining return on debt and equity are appropriate in the
post-GFC context. Further, the framework should permit the AER to have regard
to the effects of inefficiently delaying or bringing forward capital
On this basis, the committee supports the proposed changes in the AEMC Economic
Regulation of Network Service Providers rule change that seek to amend the
ways in which return on capital, return on debt, opex and capex are estimated
or forecast for NSPs. It is the committee's understanding, however, that the
rule change does not propose to include a requirement for totex to be estimated
and considered by the AER: it is the committee's view that totex should be considered
by the AER when making network determinations.
The committee recommends that:
- rates of return for network service providers are estimated using
a robust process based on guidelines developed and reviewed every three years
in consultation with stakeholders;
the proposed amendments in the AEMC Economic Regulation of
Network Service Providers rule change regarding methods for forecasting
return on capital, return on debt, opex and capex are implemented as part of that
rule change process;
- the AER should also be required to consider forecast totex when
making network determinations; and
- SCER direct 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 operating tenders for integrated
assessment of network and non-network options.
With respect to the relationship between network businesses' profits and
electricity consumption, the committee notes the recommendation in the PoC
report that 'the pricing principles in Chapter 6 of the NER [dealing with
Economic Regulation of Distribution Services] need to be amended to provide
greater guidance on how network businesses should set their tariffs to reflect
the costs' in an attempt to decouple network profits from consumption volumes.
The committee supports attempts to decouple network revenues from energy
volumes and therefore recommends that the AEMC implement an appropriate rule
The committee recommends that:
- the AEMC implement the rule change proposed in the Power of
Choice draft report to amend the pricing principles of Chapter 6 of the NER
so that greater guidance is provided on how network businesses should set their
tariffs to reflect costs; and
- the AER implement measures to decouple network revenues and
The committee acknowledges the need for reliability standards and is
aware that consumers broadly do not understand the relationship between
reliability, network infrastructure and electricity price rises. The committee
supports the ongoing use of reliability standards but also supports the calls
from some stakeholders for these to be set in a way that upholds the long term
interests of consumers.
The committee welcomes the AEMC's examination of reliability standards
in NSW and its consideration of national distribution reliability standards. As
part of this process, the committee believes that the AEMC should independently
set national reliability standards which take into account consumers' perceived
value of reliability. This would ensure that the interests of consumers are
central to reliability standards, and would bring greater transparency to and
confidence in these standards.
Further, the committee believes that national reliability standards
should be set independently of those businesses that derive income from network
infrastructure investment (that is NSPs) to address any perceived or actual conflict
The committee recommends that the AEMC set and AEMO implement
national reliability standards that take into account consumers' perceived
value of reliability and in a way that is independent of businesses that derive
income from network infrastructure.
Ex post scrutiny powers
During the course of the inquiry, the committee was informed that the
Economic Regulation Authority (ERA) (Western Australia) has scrutiny powers
that enable it to conduct ex post reviews of capex by network businesses in the
market it regulates:
...the ERA's powers under the Electricity Networks Access Code
allow it to exclude capital expenditure from Western Power's [the Western
Australian electricity network provider] regulatory asset base that it
considers inefficient. This power, which extends to forecast investment (ex
ante), and to actual investment (ex post), has helped to ensure that
capital expenditure is efficient. By way of example, $261 million ($ as at 30
June 2009) of incurred capital expenditure from the first access arrangement
was disallowed in the second access arrangement decision.
It was subsequently recommended to the committee that similar powers be
given to the AER to allow it to scrutinise actual network expenditure against
For example, Professor Garnaut stated:
...there should be closer interrogation of proposals for
investment, and ex post review of what actually happened in implementation of
those proposals is appropriate.
In direct response to the question as to whether the AER should be given
ex post scrutiny powers, the AER told the committee:
When it redesigned the regulatory framework in 2006, the AEMC
decided against the use of ex-post reviews of capex efficiency on grounds that
they are intrusive and undermine regulatory certainty. Instead, the AEMC
preferred to rely on ex ante measures to create incentives for efficient
The AEMC has subsequently revised its position. The draft
determination on the network regulation rule change proposes the use of ex-post
reviews of capex efficiency. If the AER forms the view that the network
business has spent in excess of efficient levels, then the AER would be able to
preclude inefficiently incurred capex (above the capex allowance) from being
rolled into the Regulatory Asset Base (RAB). The AEMC also proposes to require
the AER to make a statement on the efficiency of capex going into the RAB in
its draft and final determination for each network business.
The AEMC's proposed approach to ex-post reviews provides an
appropriate balance between providing investment certainty for network
businesses and providing incentives to invest efficiently. Network businesses
would have flexibility to spend in excess of allowances when necessary while
retaining incentives to incur only efficient capex.
The use of ex-post reviews is likely to make network
businesses more cautious about incurring capex in excess of their regulatory
allowances. It removes the risk—which is present under the current regime—that
network businesses may be incentivised to spend in excess of allowances.
It appears that ex post scrutiny powers would strengthen the AER's
ability to regulate NSPs and network investment. As noted by the AER itself,
such scrutiny powers would also, at least in part, address the current
incentives for network businesses to over-invest in network infrastructure. The
committee notes that the current AEMC Economic Regulation of Network Service
Providers rule change proposes to give the AER the ability to conduct 'ex
post reviews of capex efficiency' and, in the AER's words, this 'approach to
ex-post reviews provides an appropriate balance between providing investment
certainty for network businesses and providing incentives to invest
The committee agrees that the AER should be given ex post scrutiny powers
and therefore supports this proposal in the AEMC rule change.
The committee recommends that the proposal in the AEMC Economic
Regulation of Network Service Providers rule change to give the AER ex post
scrutiny powers is implemented as part of that rule change process.
Limited merits review
Another aspect of the AER's ability to regulate network businesses that
was considered deficient was the limited merits review process and network
businesses' ability to challenge the regulator's determinations (see also
Chapter 3). The committee heard that it was too easy for NSPs to challenge the
AER's decisions, that NSPs frequently did so and more often than not were
successful in having the AER's decisions overturned.
Professor Garnaut considered that the regulator would be more effective
at controlling excessive price increases if it was able to counter-appeal
decisions made by the Australian Competition Tribunal in the limited merits
Professor Garnaut suggested that this 'unusual...imbalance' should be removed:
It [the AER's decision] can be appealed by players in the
industry and there is no opportunity for counter appeal by the regulator. So
removing that unusual business imbalance, in which those who want higher prices
can appeal the regulated outcomes but there cannot be a general counter appeal
by the regulator, would make a contribution. If that were removed it might
simply be a matter of the regulator applying, more rigorously, commercial and
economic principles, because there is no doubt that the rate of return has been
set substantially in excess of the supply price of investment to this industry.
The limited merits review regime was seen by IPART as a beneficial
process for allowing network businesses to review decisions made by the
national energy regulator.
However, IPART also felt that the limited merits review did not allow the
Australian Competition Tribunal to properly consider the merits of individual
component decisions in the context of the AER's whole determination in respect
to the National Electricity Objective.
IPART opined that where a network business contests a specific
regulatory decision, the review body should be able to consider this decision
in the context of the whole determination. According to IPART:
This would give further incentive to the network businesses
in considering whether they could end up worse off rather than, as at present,
knowing that they will be neutral or better off, as a result of a review.
IPART also considered that customers should play a greater role in the
merits review process.
IPART's views appear in part to be in agreement with recommendations in
the SCER Expert Panel Review of the Limited Merits Review Regime Stage Two
At the direction of SCER, this independent expert panel—comprising Professor
George Yarrow, the Hon Michael Egan and Dr John Tamblyn—conducted a review of
the limited merits regime from March to October 2012.
The Review of the Limited Merits Review Regime Stage Two Report made
a number of recommendations, including that:
- the aim of the merits review regime should be to promote
efficiency in the investment, operation and use of networks;
- there should be a single ground for appeal;
- applications for review should be open to regulated network
businesses, energy ministers, consumer representatives and other parties with a
material interest in the decision; and
the appeals function of the Australian Competition Tribunal
should be transferred to a new review body that is fully administrative in
The committee welcomes the independent expert panel's Review of the
Limited Merits Review Regime Stage Two Report and acknowledges that many of
the recommendations therein may address some of the concerns raised about the
limited merits review regime as it currently operates. The committee urges SCER
to thoroughly consider the applicability of the recommendations in the report,
particularly where implementing these may improve regulation of the NEM in the
interests of consumers.
Resourcing the AER
The committee heard criticism about the AER's resourcing, with some submitters
and witnesses suggesting that the AER did not have the skills and expertise
necessary for it to fulfil its role.
Grid Australia believed that greater resources for the AER would assist
the regulator to interrogate data and information presented to it by NSPs.
The Chairman of Grid Australia, Mr Peter McIntyre, told the committee:
...Grid Australia members would like to see the Australian
Energy Regulator strengthened to become a highly credible, independent body, so
that it can make well-informed assessments that balance the needs of the sector
and consumers. We believe this can be achieved through greater resources being
allocated to the AER, better corporate knowledge and skills to ensure
competency, and greater credibility within the investment community.
Grid Australia highlighted that the electricity networks regulated by
the AER are worth billions of dollars and therefore the regulator must have the
technical skills required to understand the business cases of network
operators. According to Mr McIntyre:
The networks [the AER actually regulates], in gas and
electricity, are worth about $65 billion, so I think the industry expects them
to have the knowledge of the industry, not only the economic and legal but also
the engineering competence, and the ability to engage with businesses in a deep
and constructive way to truly understand the businesses' needs and business
Dr Paul Troughton of EnerNOC suggested that network businesses attempt
to overwhelm the AER with detail in order to prevent the regulator from making
If I were a regulated business then my best dollar spent
would be in trying to swamp the regulator with information so that they could
not make effective decisions.
If you look at what is submitted to the AER for each of these
regulatory determinations, there is a proposal from each network and a
response, and then you get various extra iterations. There are hundreds of
thousands of pages, from each network, of argument and backup information. It
is an enormous task. It is very depressing to think that all these people are
wasting this time doing that. Much of it is not actually dealing with the main
issues; it is throwing lots of miscellaneous detail.
The Total Environment Centre (TEC) emphasised that while it found:
...AER staff to be highly capable and professional...there just
are not enough of them and that they do not have enough power. So more
resources to the AER would be a good thing.
Energex suggested that while the AER may not have all of the necessary
expertise "in house":
...my experience with regulators is that they engage pretty
good consultants who do a very thorough job in reviewing our forward plans. So
it seems to me that they are quite well resourced to review our forward capital
plans, and certainly they also engage the best consultants to review our energy
and demand forecast as well. So my observation is that they have certainly
brought to bear the best consultants.
Professor Garnaut argued that the AER is adequately resourced, but is
inhibited by the regulatory framework in which it operates. According to
...there are very good people there who have been hamstrung to
a considerable extent by the rules, which allow people in the industry to
appeal a decision but do not allow the regulator to make a counter-appeal
following proposals for change from people in the industry. Evening up that
balance will equip the regulator better. It is unlikely that things would not
be improved through better resourcing because it is a complicated question, and
a lot of resources will be needed to do it properly. Analysis is the first
thing required, and so we would have to make sure we had the right types of
analytic capacity. The ACCC is a highly reputed body in Australia and the AER
is part of that system. I recommend that the committee make sure it is well
resourced, but I am not making any comment about it being poorly resourced at
In responding to claims about its skills and expertise, the AER informed
the committee that it is bringing more skilled workers into the organisation
and relying less on consultants. Chairman of the AER, Mr Andrew Reeves, told
First of all, our practice has been to engage engineering
consultants to inform the regulator. We will continue with that but we are also
moving on from that to bring more skills in-house. We acknowledge the concerns
of the business. One of the positions put to us has been that the regulator is
being given more discretion and it is important that the regulator exercise
that discretion with the confidence of the community. We are addressing some of
those factors that have been raised by bringing some of the additional
technical skills in-house.
The committee shares the concerns raised about the adequacy of the AER's
resourcing. The AER's resourcing—as it relates to the regulator's ability to
effectively perform its role—should be the subject of ongoing consideration.
The committee is also conscious that it, and others, have recommended expanded
or additional powers for the regulator and therefore recommends that the AER
should be allocated greater funding, expertise and accountability, particularly
in light of any additional responsibilities it is given.
The committee recommends that the AER receive additional funding,
expertise and accountability including that in recommendations of the Limited
Merits Review Regime Stage Two Report in relation to appeals processes.
Intent of the National Electricity Objective
The National Electricity Objective (NEO), as set out in the NEL, is:
To promote efficient investment
in, and efficient operation and use of, electricity services for the long term
interests of consumers of electricity with respect to –
(a) price, quality, safety,
reliability, and security of supply of electricity; and
(b)the reliability, safety and
security of the national electricity system.
Some submitters and witnesses were concerned that the NEO does not
sufficiently take into account the interests of consumers and on this basis
warrants change. Proposed changes to the NEO for the purpose of strengthening
consumer protections are discussed in Chapter 6.
The committee heard from other submitters and witnesses that the NEO
should be amended to include an environmental objective.
The TEC claimed:
One of the great deficiencies of the NEM is that it is
focused only on delivering the energy with the cheapest short-term marginal
cost of production. The NEM is ill-suited to recognise the long term economic
as well as environmental benefits of energy storage, local generation, and even
Further, the NEO does not support climate and renewable
energy policies, and struggles when their implementation appears to conflict
with the overarching objective of the NEM...Regulators and energy ministers often
complain that introducing an environmental criterion to the NEO would make
their work difficult, if not impossible. This knee-jerk reaction flies in the
face of evidence both from other OECD countries where environmental objectives
feature in electricity network regulatory regimes...TEC does not propose anything
so radical...we merely ask that in addition to the current 5 criteria,
"greenhouse gas emissions and intensity" is added.
The AEMC offered the following response to suggestions that the NEO
should include an environmental objective:
We of course would apply and pursue whatever objective
parliament see fit to give to us. This issue is not a new one. The way I think
about it is with a football team analogy: everyone on the team has the same
objective; it is just that we have different positions and different roles.
Apologies to those who do not come from rugby states but, if the bonehead
thinks that the five-eighth is not doing a good job, the worst thing he can do
is try and do the five-eighth's job for him. Our role in relation to rules that
relate to economic efficiency is part of one role in what people expect out of
this sector. There are other manifestations of government that obviously deal
with environmental issues in a systemic sense, such as climate change and, in a
local sense, land use planning and emissions—NOX and SOX and salts and things
from the plants. You could make the same comment about suggestions around
social objectives. Again, there are other parts of government that address
that. I really say that as an explanation. Because these national electricity
objectives drive what we do, that is not to say that we do not care about those
other aspects; it is just that there are other parts of government that have
responsibility and have the roles for those. Just like a football team, it
works best when people in different roles coordinate with one another. I think
part of our role is to inform those other parts of government what the effect
on this efficiency objective is of things they are thinking about and,
certainly in relation to social objectives, providing advice to governments so
that the qualitative or social value judgements are as informed as possible.
The committee agrees that better alignment between environmental
policies, in particular climate change policy, and the NEM to ensure these are
not incongruent and working at odds would be beneficial. To this end, the
committee recommends that the AEMC consider how the NEO could be amended in a
way that would ensure operation and regulation of the electricity market in ways
consistent with broader environmental policy objectives.
The committee recommends that the AEMC consider how broader
environmental considerations could better align with the operation and
regulation of the NEM.
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