The rule-making process and institutional framework
This chapter examines aspects of the operations and performance of the
Australian Energy Market Commission (AEMC) and the Australian Energy Regulator
(AER) in detail. In particular, this chapter focuses on the rule-making
process, the overall performance of the two organisations and suggestions for
changes to the institutional framework.
The AEMC makes and amends the national electricity and gas rules.
With the exception of minor matters, the AEMC cannot initiate rule changes
itself; it relies on the AER, other stakeholders and interested parties to
submit rule change proposals to it.
Rule changes can also have their origins in the reviews of aspects of the
energy markets that the AEMC undertakes at the request of the COAG Energy
Criticism of the AEMC's process and
The committee received evidence from stakeholders who were dissatisfied
by their experiences engaging with the AEMC. The speed of the rule-change
process was one aspect that was criticised. The Total Environment Centre drew
the committee's attention to a rule change request it submitted in November
2013. Despite being complemented by a similar proposal the COAG Energy Council
lodged one month later, the AEMC only opened consultation on the request in
The Total Environment Centre added that rule change requests typically take two
years after the process has formally commenced.
Mr Oliver Derum from the Public Interest Advocacy Centre explained that
he considers the AEMC is 'completely driven by economic theory and ideas about
how this all works out there' and 'just do not have regard to the real world'.
To support this criticism, his colleague Dr Gabrielle Kuiper noted that the one
rule change proposal consumer groups have put forward 'was roundly rejected by
The proposal, developed by the Consumer Action Law Centre jointly with the
Consumer Utilities Advocacy Centre, related to contracts described as 'fixed'
where the retailer could still change the electricity price at any time with
notification. The rule change proposal sought to prohibit retailers from
varying prices during the period of time that the fixed contract covered. Mr
Gerard Brody, the chief executive officer of the Consumer Action Law Centre
explained the rationale for seeking the change:
We had had a lot of complaints from people who had signed up
to a fixed period contract only to have the price change mid-contract. If you
look at those contracts, they all have fine print which allows the retailer to
do that. We wanted a rule change to stop that practice, and we proposed that to
The committee was informed that the AEMC rejected the proposal 'on the
grounds that you simply needed to provide consumers with further information'.
Mr Derum suggested that the AEMC took this approach as it did 'not want to
distort the purity of the market and market interactions, so their answer is
In addition to what consumer groups considered was an unfavourable
outcome, the significant effort involved in seeking a rule change was also
noted. The Consumer Action Law Centre outlined its experience in
developing this proposal:
We initially scoped that rule change around the middle 2013.
Our rule change was researched, and a lot of effort went into it during that
year. We submitted the rule change in October 2013. It took 12 months for
the rule change process; we did get a decision from the AEMC in October 2014...It
is a very lengthy process. It took a lot of resources from a small consumer
organisation like ours to run that rule change process. We were able to get
some funding support, but it was a significant undertaking for us.
The Energy Users Association of Australia (EUAA) also remarked on the
resource-intensive nature of mounting a rule change bid. The EUAA's chairman,
Mr Brian Green, advised that the EUAA found the process 'extremely
expensive and very restrictive'. For example, the EUAA had to engage a
consultant in the United Kingdom to advise it on the proposal as the
consultants in Australia who were familiar with the issues targeted by the rule
change proposal were 'conflicted because they were engaged at some point by
generators or networks'. Mr Green added that ultimately the EUAA's proposal was
amalgamated into another put forward by the AER.
Mr Green concluded that while the entire process is 'extremely
cumbersome' at present, in his view there 'is considerable room to be able to
streamline and simplify the processes without losing any of the rigour of the
process'. The EUAA called for streamlining of the process and noted that it
would welcome 'the establishment of a group that could look at this issue and
put forward changes in a far more timely fashion.
Effectiveness of the current regulatory system
Several stakeholders commented on the number of regulatory and
rulemaking bodies, the various jurisdictions to which they belong, and the
overall complexity of the framework. For some, this was a key weakness of the
The Total Environment Centre pithily summed up the 'national' approach
to electricity market regulation as 'fragmented and cumbersome', a mixture of
'part state and part federal; part public and part private'.
Mr Bruce Mountain remarked that Australia's framework is based on 'elaborate
and bureaucratic rules-based arrangements',
and that he is not aware of another country that 'prescribes economic
regulation of electricity utilities in this way'. Mr Mountain provided the
following insight into the approach used in other countries:
The [European Union] asked member states recently to explain
their regulatory frameworks. The Brits had a reason to jot down on a couple of
pages how they regulate. In essence, it was, 'We consider the long-term
interests of consumers in setting our regulatory framework.' The regulator has
regard, as it ought to, to a wide range of factors—the cost of capital, the
asset valuation—and makes decisions on those as a broad package. This is a
holistic, complex business that has many levers to pull. It should have the
ability to pull all of those levers and make a decision and not have
constrained 'Look at this and don't look at that, and when you look at this you
must do it like this and you must do it like that. And if you wish to change
it, then go through a rule change process separate to the existing form.'...In
the [United States of America] they have some broader-level objectives, they
have more policy objectives and they have a lot of history of what they have
done, so there are legal arguments on historical decisions that are weighed in
a regulatory framework, but that does not impinge on the authority of the
regulator to make a decision.
The chief executive of the AEMC, Mr Paul Smith, noted that the framework
reflects the fact that it is multi-jurisdictional. The AEMC reports to the COAG
Energy Council because 'the legislative power in relation to energy sits with
the states and territories, so, in order for the rules that we make to have
effect, that needs to be under legislation supported by the state and territory
Whether this framework could be changed was questioned; Mr Mountain told the
committee it was his understanding that the creation of the AEMC as a
rule-maker was intended to alleviate state governments' concerns about the
regulation of their network service providers by the AER, a Commonwealth body.
Mr Mountain commented that 'it is perfectly understandable that states should
want to circumscribe' the AER:
The income from electricity utilities is a major source of
income for state governments, the single largest of their government owned
businesses. The debt held by the network owned business is by far the
biggest allocation of state government borrowing.
Ms Michelle Groves, the chief executive officer of the AER, noted that
the roles and structure of the various institutions is a policy decision.
However, within this framework she noted that the bodies work cooperatively
with 'fairly extensive memorandums of understanding between us to ensure there
is close cooperation and no gaps between the work we each do and that each of
us is informed by the other's work'.
The AEMC's and AER's performance
This section considers the performance and accountability of the AEMC
and the AER. Specific issues discussed include the AER's funding, the level of consumer
input in the decision-making processes and governance of the AEMC and the AER,
and the accountability frameworks that the two bodies are subject to.
Overall views on performance
The evidence received about the performance of the AEMC and AER was
generally balanced, objective and recognised that the institutions were
required to perform their tasks within a framework they did not establish. It
is important to note that a number of stakeholders were quick to express
confidence in the officers working at the various regulatory and rule-making
institutions. For example, UnitingCare commenced its submission by 'recognising
the calibre of staff' at the AER, AEMC and the Australian Energy Market
Operator (AEMO). UnitingCare expanded on that comment with the following statement:
Experience of working with these organisations and their
staff has always been very constructive and we strongly value the contribution
that individual staff make to the organisation and to their endeavours to meet
the National Energy Objective.
The independence of the regulator and the rule-making body was presented
as being a fundamental strength of the system. For example, the AEMC emphasised
how its commissioners are protected from external pressures:
In relation to the appointment of our commissioners, I think
probably an analogy for a commissioner would be with a Director of Public
Prosecutions or an Auditor-General. Once they are appointed, they are appointed
for a specified term, and they can only be dis-appointed, in effect, for some
sort of gross misconduct or something like that. Their terms cannot be ended in
relation to the merits of particular decisions or if a minister had a view that
a particular decision was not appropriate.
The transparency of the regulatory system's objectives and processes was
highlighted as another key strength. The AEMC noted that once a rule change
proposal is lodged, whether the change is made is the AEMC's decision alone;
that is, 'there is no further process whereby the state governments must
approve or sign off or have any direct power to change a rule change once we
have made it'.
The AEMC highlighted other aspects of its operations that ensure the
decision-making process is transparent. These include that:
the objectives the AEMC assesses decisions against, such as the
national electricity objective, are transparent given they are set out in
any person or organisation other than the AEMC may lodge a rule
generally two stages of consultation take place when the AEMC is
undertaking a rule change process and responses to the consultation are
published on the AEMC's website; and
the AEMC publishes 'an extensive decision document...explaining the
reasons and explaining how we have taken account of stakeholders' comments in
The outcome of an AEMC review conducted at the request of the COAG Energy
Council was also considered. While the AEMC acknowledged that the COAG Energy
Council could ignore or delay action on recommendations that the AEMC made
following a review, it emphasised that the framework ensures 'there is no veto
by energy ministers'. The AEMC argued that any group interested in the AEMC's
recommendations could submit them as a rule change proposal. An AEMC officer
provided an example of this occurring in practice:
On power of choice, for example, the Total Environment Centre
picked up part of our recommendations and beat ministers to it and sent in a
rule change themselves based on our recommendations. So if energy ministers do
not pick them up there is nothing that stops someone saying, 'I think that's a
good idea. Here's a rule change to do it.' So...there is no veto by energy
Submitters provided comments specifically about the AER. Mr Bruce
Mountain acknowledged that the AER 'has a difficult job to do' as it is tasked
with 'making very tough decisions on the distribution of resources and taking
on very powerful vested interests'.
While the AER's status an independent statutory authority was acknowledged, it
was also suggested that the AER has limited authority and this was a possible
reason why optimal outcomes were not being achieved. To support this argument,
Mr Bruce Mountain recited a long list of things the AER cannot do:
It cannot choose, for example, to fundamentally change the
regulatory regime. It cannot say: 'I do not want to do a five-yearly price cap;
I want to do an annual cap. I do not want to set caps on revenues and prices; I
want to look at your actual expenditure. I want to treat government utilities
differently from private firms.'...It cannot set the security and planning standards
that the networks are told to build their lines to. That massively impacts the
expenditure program and is a major reason for the change in those programs...It
cannot revalue assets in any terribly meaningful way. To some degree it can
with most recent assets, but on the fundamental asset base it cannot. It cannot
vary the indexation of the asset values over time, which, at the moment, are
indexed by CPI. It cannot say, for example, 'I wish to not index them...It
has incomplete control of the cost of capital. It has some level of
control over it but it is incomplete. It has the prospect of review of
individual decisions but it cannot review the total decision. It cannot
take ownership into account as a major variable and it does not set prices or
Major Energy Users also emphasised that the AER is constrained in that
it can only act within the National Electricity Rules (NER) and because network
service providers 'only have to provide the information that is required by the
NER, and in the format that the NER require'. It concluded that if the NER
'are deficient in a way that prevents the AER from exercising sensible
regulation, then this is a flaw in the rule setting process rather than in the
regulatory process'. Further, it argued that any shortcomings in the way
network services providers interact with the AER, as well as the other issues
being examined by this inquiry, are due to weaknesses in the NER (of which
it considers there are many) rather than being a result of other causes such as
how the AER regulates.
The Consumer Action Law Centre similarly argued that criticism of the
AER is misplaced if it does not recognise the AER is limited by the rules it
administers. The Centre remarked that:
The success of appeals by businesses suggests that the AER
did endeavour to limit businesses' revenue, but many of its decisions were
wound back due to unfavourable rules.
The Agriculture Industries Electricity Taskforce also noted that the AER
has limited authority. Overall, as the AER is the regulator of regulations
developed by the AEMC, the Taskforce considered that 'the AER has a
subservient, constrained role'.
During this inquiry, a variety of stakeholders observed that there were
clear financial incentives for network companies to use their resources to
overwhelm the regulator and challenge its decisions. Given this, whether the
AER was resourced appropriately was a topic that was discussed. For example, in
its submission, Cotton Australia questioned whether the AER had sufficient
resources to consider and analyse the information it receives to ensure the
determinations it makes are 'fair and balance the investment and expenditure
needs of the networks, with the community's need for reliable, secure and
affordable electricity supply'.
Ms Cally Wilson, the former employee of Energex who made public her
concerns about data manipulation and other practices at Energex, told the
I think the AER is very much
understaffed and underfunded at present. If you look at the AER's budget
versus a company such as Energex's, it is clearly not resourced enough to be
able to take on such a large corporation. And Energex is only one of a
multitude of corporations.
When questioned about the AER's resources, its chief executive officer
noted that generally all regulators would like more resources. However, Ms
Groves added that the AER has 'fairly significant resources' in terms of its
'very experienced staff', ability to access independent consultants and its
effective regulatory tools.
Ms Groves also noted that the AER had established 'a technical advisers
group'. This group is intended to provide the AER with:
greater industry expertise, particularly in power system
engineering. The members of this group bring a wealth of knowledge and
over 100 years of combined industry experience to the AER, and have
significantly enhanced the internal expertise that we had already developed.
Finally, Ms Groves noted that the AER's capabilities have been enhanced
as a result of the recent rule changes, as the AER can use 'the methods and
tools that we think are appropriate...and are consistent with the sorts of tools
and processes that energy economic regulators around the world use'.
The AER board has also been recently supplemented as, following the most
recent appointments made in 2014, it now comprises three full-time members.
Previously, the AER board had two full-time members and one part-time member.
Some of the recent efforts to enhance the representation of consumer
interests in the determination process, such as the creation of the AER's
consumer challenge panel and the replacement of the AEMC's consumer advocacy panel
with Energy Consumers Australia, were noted in Chapter 6. However, some
submitters argued that consumers should be represented more explicitly in the
AEMC's and AER's governance arrangements and decision-making processes. For
example, the Total Environment Centre argued that the AEMC and the AER's board
are made up of 'industry insiders with no consumer representation'.
The concern about the composition of the AEMC's and AER's governing bodies
followed the criticisms outlined previously in this chapter that the two
institutions are too focused on abstract perceptions of economic efficiency,
rather than the actual experiences and preferences of consumers.
The EUAA argued that consumer representation on the governing bodies of
both organisations is necessary 'to deliver improved governance and more
balanced decision making for these institutions'.
Mr Robert MacKenzie, a director of Canegrowers Isis, focused on the AER and
suggested that the AER needs energy user representation on its board so that it
is 'able to give proper consideration to its pricing impact on customers'.
Accountability and assessment of
An effective regulatory system requires the decision-making institutions
within it to have the ability and willingness to assess their past performance.
Robust external scrutiny of the rule-makers and regulators is also
required. The following paragraphs consider the accountably of the AEMC
and the AER.
Ex-post performance assessment
Ex-post assessments of decisions can be particularly beneficial in the
regulatory environment. Comprehensive assessments of past decisions can inform
and improve future decision-making while also helping to foster a culture of
continuous improvement. In turn, this may help the regulator's credibility
among the entities it regulates and in the community more generally. In the
context of electricity regulation, ex-post reviews could consider the
assumptions made in the AER's benchmarking process in light of actual outcomes.
Given that perceived weaknesses with the AEMC's past decisions can be
addressed by asking the AEMC to consider a rule change, which would necessitate
an examination of its past decision, this issue appears to be more applicable
to the AER. The AER was asked whether it compared its theoretical benchmarking
model with what actually happened during the regulatory control period. In
response, Mr Sebastian Roberts, a general manager at the AER, advised that
when considering operating expenditure the AER uses data it has collected over
eight to ten years to compare the costs across the different network companies.
This information has been applied in the draft determinations for New South
Wales and the Australian Capital Territory for the 2014–19 regulatory period,
resulting in substantial cuts in operating expenditure proposals 'ranging up to
38 per cent'.
Current accountability framework
Both the AEMC and the AER are subject to clear accountability frameworks,
however, reflecting the different jurisdictions in which they are established
and how they are funded, they have separate lines of accountability.
The AEMC is accountable to the COAG Energy Council. The AEMC's chief
executive explained that the AEMC provides reports to the Council twice a year on
the AEMC's work program, activities and how the AEMC has fulfilled its mandate.
The COAG Energy Council is also responsible for approving the AEMC's annual
As an independent Commonwealth statutory authority, the AER is
accountable to the Australian Parliament. Ongoing parliamentary oversight of the
AER is undertaken through the scrutiny associated with the budget process and
the requirement that an annual report on the AER's activities be presented to
the Parliament. The AER falls under the Treasury portfolio and the responsible
minister is currently the Minister for Small Business. The AER has been issued
with a statement of expectations by the Australian Government and has responded
with a statement of intent.
The AER is a constituent part of the Australian Competition and Consumer
Commission (ACCC); consequently, the AER's staff, resources and facilities are
provided by the ACCC. The ACCC and the AER present a combined annual report,
although the AER prepared an additional annual report covering just its
operations for the first time following the 2013–14 financial year. The AER
attends the Senate Economics Legislation Committee's estimates hearings
along with the ACCC.
In addition to the AER's accountability to the Commonwealth, the multi‑jurisdictional
COAG Energy Council has also outlined its expectations of the AER. In March
2014, the COAG Energy Council issued a statement of expectations about the
AER's roles and responsibilities, relationship with government and relating to
issues of transparency and accountability. In response, the AER has published a
statement of intent.
The Consumer Action Law Centre noted that moves to enhance the framework
for assessing the performance of regulators were occurring in other sectors.
The Centre noted that the Financial System Inquiry recently recommended that
the financial regulators (such as the Australian Securities and Investments
Commission and the Australian Prudential Regulation Authority) be subjected to
a regular performance review.
Specifically, that inquiry recommended that a new Financial Regulator
Assessment Board would review the performance of the financial sector
regulators on an annual basis. The regulators' performance would be assessed
against their statutory mandates and the priorities identified in their statements
Further, each of the regulators should undertake six-yearly capability reviews
to 'ensure they have the required skills and culture to maintain effectiveness
in an environment of rapid change'.
The COAG Energy Council is considering the effectiveness of the current
accountability and governance framework. A review of the governance
arrangements commenced in February 2015 and is due to report in September 2015.
The review has been tasked with:
considering the performance of current governance arrangements
for energy markets; and
providing advice on potential areas of improvement to the
institutions and their oversight by the COAG Energy Council'.
Proposed consolidation of rule-making and regulatory functions
One of the fundamental features of the current institutional framework
is that the rule-making and regulatory functions are separated: one
organisation (the AEMC) makes the rules while another (the AER) implements
them. Several submitters expressed doubt about the merits of continuing this
arrangement and suggested that the AEMC and AER should be amalgamated into one
organisation. A starting point for this argument was that the approach in
Australia's NEM was unique:
The EUAA believes that there is a fundamental problem with a
governance structure that separates the design and implementation of the rules.
As far as the EUAA is aware, no other country has applied this separation of
* * *
Australia is, as far as I know, unique internationally in
having separate institutions responsible for the design and implementation of
regulation. This institutional bifurcation reflects part of the
Commonwealth-state bargain that resulted in the transfer of the implementation
of economic regulation from state commissions to the AER. The institutional
separation of design and implementation and as part of this, the codification
of regulation in the Rules, has constrained the AER as intended.
Arguments for and against the
One rationale put forward for amalgamating the AEMC and the AER was
based on perceived faults identified about the AEMC's approach and actions.
The Consumer Action Law Centre argued that 'the AEMC were strong
proponents of restricting the AER in its ability to regulate the network
businesses through providing detailed prescription in the rules'. The Consumer
Action Law Centre observed that 'it seems...that the public and political
pressure to deliver consumer outcomes is placed on the AER as regulator, rather
than the AEMC as rule-maker'. As a result, the Centre questioned whether a
separate rule-maker was ultimately in the long-term interests of consumers; at
the very least, the Centre argued that accountability is 'diluted between two
different organisations'. The Centre considered that replacing the two separate
institutions with one that both makes and administers the rules could
potentially be an improvement as the new institution would be clearly
accountable for regulatory outcomes.
The Total Environment Centre commented that it 'was not always clear'
why the AEMC and AER were separate. However, its criticism was directed at the
approach both organisations have taken when exercising their functions. It
argued that the AEMC 'operates under a very narrow interpretation of the
long-term interest of consumers; everything is reduced to economic efficiency,
when clearly consumers have non-economic interests as well'. In relation
to the AER, the Total Environment Centre claimed that the regulator 'generally
interprets its mandate very narrowly and prescriptively'.
A representative of the New South Wales Irrigators' Council suggested
that the AEMC was 'one step removed' from the determination process, which may
have allowed it to maintain 'a very black-and-white understanding of economic
The committee also heard from submitters critical of how the separation
of the AEMC and AER weakens the overall rule-making process and slows down efforts
to improve the system. For example, Dr Gabrielle Kuiper from the Public
Interest Advocacy Centre told the committee that her organisation was
'disappointed' that changes to demand management incentives had to wait until
the AEMC makes a decision on a rule change. As a consequence, determinations
currently being made by the AER, which will be in place for the next five
years, will not address the changes sought by the Centre. Dr Kuiper explained:
...the AER has said in its draft determinations that it is
proposing not to prepare a new demand management incentive scheme until such
time as the AEMC has been through the rule change process on demand management.
The AER's argument is that a revenue determination process is not a rule‑setting
process so we should wait for the AEMC. However, the question is: what recourse
do consumers and consumer advocates have if the AEMC is not performing its
functions in a timely manner?
The amalgamation of the AEMC and the AER could support other changes to
address what submitters considered were fundamental problems with the current
framework, such as those regarding the regulation of state government-owned
companies that were examined in Chapter 5. Mr Mountain argued that 'bifurcation
between design and execution' of the rules does not make sense for private or
government-owned distribution companies. However, he proposed that a combined
AEMC and AER body would regulate only privatised networks; government-owned
distributors could instead be regulated directly by their state government
Mr Mountain concluded that under this model there would be no need
for 'elaborate and bureaucratic rules-based arrangements'. Mr Mountain added
that his proposal reflected 'the standard model for ownership-differentiated
regulation prevalent in the United States and much of Europe'.
Arguments in favour of retaining the separation of the AEMC and the AER
were presented mainly by the AEMC itself. The chief executive of the AEMC noted
that rule-making and regulation are 'different functions' that, in his view,
require 'different considerations, different analysis and different knowledge
We feel that there can be some advantages, and there are some
advantages, to a rule maker separate from the person administering the rules.
We are not charged also with implementing the rules so we can have a look and
say whether these are working effectively and take a view on how they are being
applied in practice.
The chief executive officer of the AER, Ms Michelle Groves, added that
the AER participates 'very strongly in AEMC processes', ensuring that when the
AEMC is considering a rule change, it has the input of the regulator' who
applies these sorts of rules on a day-to-day basis'. Ms Groves noted that
ultimately any change to the institutional framework would be a decision for
Consideration of the AER and the
AEMC by other inquires
At this point, it is useful to note that other significant inquiries have
considered the respective functions and responsibilities of the AER and the
AEMC. When it explored the issue in 2013, the Productivity Commission (PC) provided
the following summary of the arguments for and against amalgamating the AEMC
and the AER:
In principle [combining the AER and the AEMC]...could promote closer
interaction, communication and coordination between the 'regulators' and the
'rule makers', which could lead to better quality rules and decisions being
made. Currently, lack of coordination and overlap of AEMC and AER activities
has been seen as problematic...However, this option also raises potential
conflicts of interest for the rule makers in the merged agency. For instance,
they may be influenced to make rules that ease the task of the regulators in
the agency, rather than being beneficial for the wider community.
The PC concluded that changes to the memorandum of understanding in
place between the ACCC, AEMC and the AER might better address concerns about
coordination and overlap in activities.
The PC also considered whether the AER should remain as part of the
ACCC. While it decided that the AER should remain located within the ACCC,
this issue has arisen again as part of the independent competition policy
review chaired by Professor Ian Harper. The Harper Review recommended that
a single national access and pricing regulator should be established. It
envisaged that such a body which would assume the AER's functions and the
relevant functions of several other bodies, such as the ACCC's telecommunications
access and pricing functions. In its final report, the Harper Review argued
that providing the access and pricing regulator with responsibilities across
multiple industries was a key feature of its proposal, as it 'would avoid the
possibility of an industry-specific regulator being susceptible to
"capture" by the regulated industry'.
Given the Harper Review took place while this inquiry was underway
(the Harper Review's draft report was issued in September 2014), it is not
surprising that some submissions commented on the proposal for a single pricing
and access regulator. In its submission to this inquiry, the Consumer
Action Law Centre argued against the proposed change, as it considered 'there
is much consumer benefit from economic regulation working in tandem with
consumer and competition regulation'.
It added that competition, consumer protection and economic regulation in the
energy sector are functions that are 'inextricably linked and are based on an
economic understanding that fair and effective markets are in the long-term
interests of consumers'.
The timeliness of the process for making changes to the NER is of
significant concern to the committee. The process appears drawn out at every
step. An AEMC review may first need to provide evidence that a rule change is
required. A rule change proposal then needs to be developed and lodged with the
AEMC. The AEMC then needs to initiate the rule change process and conduct
consultation before making a decision. Even rule change requests lodged by the
COAG Energy Council do not appear to be dealt with expeditiously. Accordingly,
the committee considers the rule change process should be more responsive.
The committee also considers that the AEMC should have a role in
enhancing policy coordination more generally.
The committee recommends that the Australian Energy Market Commission is
provided with the ability to initiate a rule change process without being
required to receive a rule change request from an external party.
The committee recommends that the Australian Government pursue, through
the COAG process, amendments to the National Electricity Law to require that
the Australian Energy Market Commission must commence public consultation on a
rule change request within a prescribed period of time if the rule change
request has been lodged by the COAG Energy Council.
The committee recommends that the Australian Government pursue, through
the COAG process, an agreement that any Commonwealth, state and territory
energy policy schemes and measures that may have implications for the National
Electricity Market or network efficiency must be referred to the Australian
Energy Market Commission for formal advice regarding the likely effects on the
long-term interests of consumers.
The committee carefully considered proposals to change the framework of
rule-making and regulatory institutions involved in the National Electricity Market.
Both the proposal to amalgamate the AEMC and the AER that many submitters
advocated and the Harper Review's recommendation that a single national access
and pricing regulator should be established are intriguing ideas. Given that
the Australian Government is already considering the Harper Review's proposal,
the committee draws the Government's attention to the issues outlined in this
report about the performance of the AER and the implications of rule‑making
and regulatory functions being performed by different agencies.
The committee also notes that should the Government decide to establish a
single access and pricing regulator, it is essential that the agency's
electricity regulation responsibilities are appropriately resourced and
In light of the recommendation made by the Competition Policy Review
(Harper Review) regarding a single national access and pricing regulator, the
committee recommends that the Australian, state and territory governments
the potential efficiencies and other advantages of a single
national access and pricing regulator; and
whether such a proposal would be in the long-term interests of
consumers of electricity, given the need for a regulator with sufficient
expertise to challenge, when required, well-resourced electricity network
Electricity regulation frameworks are marked by asymmetries: the
regulated entity will always have more resources and better information
compared to the regulator. However, as the AER's decisions have significant
consequences for all households and businesses in Australia, the committee considers
that the AER's standing should be improved by enhancing its expertise and capabilities.
For example, the committee has recommended an increase in the number of AER
board members and a review of the AER's resources.
Given the importance of the AER's decisions, the committee also
considers there are enhancements that should be made regarding the oversight
arrangements for the AER and how the AER receives feedback about its
performance. The committee considers the accountability and performance of the
AER could be increased by introducing public consultation on the statement of
intent the AER prepares in response to the COAG Energy Council's statement of
expectations. This consultation process would provide an opportunity for the
AER to receive feedback from key stakeholders about its operations and
priorities. In addition, the committee considers there are opportunities
to enhance the parliamentary oversight of the AER. The committee will
write to the Senate Economics Legislation Committee, which has responsibility
for the ongoing oversight of the AER, to ask it to consider giving greater
prominence to the AER as part of that committee's annual work program.
While the committee's recommendations in this area assume the continued
existence of the AER, they are intended to apply generally to any agency that
may assume the AER's functions. In particular, should the Australian Government
decide to establish a single national access and pricing regulator as
recommended by the Harper Review, the substance of the committee's
recommendations should still inform the development of governance, funding and accountability
arrangements for the new agency.
The committee recommends that the Australian Government commission an
external review of the capability of the Australian Energy Regulator (AER). The
review should consider:
the adequacy of the AER's financial resources;
the effects of the 2014–15 budget cuts; and
whether the AER has the skills and powers needed to perform its
The committee recommends that the Australian Energy Regulator should
facilitate public consultation on the statement of intent it develops in
response to the COAG Energy Council's statement of expectations.
The committee recommends that the board of the Australian Energy
Regulator should be reformed so that:
the number of board members is increased from three to five;
the requirement for a Commonwealth member and two state and
territory members is abolished with future appointments based solely on merit;
all appointments to the board are to made by the Commonwealth;
at least one board member is required to have knowledge of, or
experience in, consumer affairs in energy matters; and
at least one board member has expertise in decentralized energy
systems and demand management.
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