Electricity network regulation
Inquiry report
The Commission's report is in two volumes. Volume 1 contains the Overview, the Recommendations and findings and Chapters 1 to 8. Volume 2 contains Chapters 9 to 21, Appendix A and the References. Appendices B to F are only available online.
Download the overview
Overview (PDF - 1835 Kb)
Overview (Word/Zip - 1046 Kb)Download the report
- Volume 1 - Electricity network regulatory frameworks (PDF - 5798 Kb)
- Volume 1 - Electricity network regulatory frameworks (Word/Zip - 4765 Kb)
- Volume 2 - Electricity network regulatory frameworks (PDF - 6446 Kb)
- Volume 2 and online only appendices - Electricity network regulatory frameworks (Word/Zip - 525 Kb)
Key Points
- Average electricity prices have risen by 70 per cent in real terms from June 2007 to December 2012. Spiralling network costs in most states are the main contributor to these increases, partly driven by inefficiencies in the industry and flaws in the regulatory environment.
- These flaws require a fundamental nationally and consumer-focused package of reforms that removes the interlinked regulatory barriers to the efficiency of electricity networks. Reforms made in late 2012, including improvements to the regulatory rules, better resourcing of the regulator and greater representation of consumers, have only partly addressed these flaws.
- Resolving benchmarking and interconnector problems will be a worthwhile addition to these recent reforms. But there remains a need for further significant policy changes to make a substantive difference to future electricity network prices, and to produce better outcomes for consumers - the latter being the primary objective of the regulatory arrangements. The changes needed include:
- modified reliability requirements to promote efficiency
- improved demand management
- more efficient planning of large transmission investments
- changes to state regulatory arrangements and network business ownership
- adding some urgency to the existing tardy reform process. The Standing Council on Energy and Resources needs to accelerate reforms - particularly for reliability and planning - which have been bogged down by successive reviews. Delays to reform cost consumers across the National Electricity Market (NEM) hundreds of millions of dollars.
- The gains from a package of reforms are significant. Indicative estimates suggest:
- in New South Wales alone, $1.1 billion in distribution network capital expenditure could be deferred until the next five year regulatory period by adopting a reliability framework that takes into account consumers' preferences for reliability. The actual savings are likely to be larger
- adopting a different reliability framework for the transmission network could generate large efficiency gains in the order of $2.2 billion to $3.8 billion over 30 years
- if carefully implemented, critical peak pricing and the rollout of smart meters could produce average savings of around $100-$200 per household each year in regions with impending capacity constraints (after accounting for the costs of smart meters).
- Reliability is critical to electricity networks, but some consumers are forced to pay for higher reliability than they value.
- Reliability decisions should be based on trading off the costs of achieving them against what customers are willing to pay, rather than by prescriptive (sometimes politically influenced) standards.
- A large share (in New South Wales, some 25 per cent) of retail electricity bills is required to meet a few (around 40) hours of very high ('critical peak') demand each year. Avoiding this requires a phased and coordinated suite of reforms, including consumer consultation, the removal of retail price regulation, and the staged introduction of smart meters, accompanied by time based pricing for critical peak periods.
- This would defer costly investment, ease price pressures on customers, and reduce the large hidden cross subsidies effectively paid by (often lower income) people who do not heavily use power in peak times, to those who do.
- Rolling out smart meters would also produce major savings in network operating costs - such as through remote meter reading and fault detection.
- The Commission is proposing a process that learns from the experience of the Victorian smart meter rollout, and that will genuinely benefit consumers.
- State-owned network businesses have conflicting objectives, which reduce their efficiency and undermine the effectiveness of incentive regulation. Their privately-owned counterparts are better at efficiently meeting the long term interests of their customers.
- State-owned network businesses should be privatised.
- The efficiency and effectiveness of recently announced reforms could be enhanced.
- Given their overlapping roles, the three fully-funded consumer advocacy bodies in the NEM should be ultimately amalgamated into a single statutory body that would act on behalf of all consumers. It should be fully funded through an industry levy, and have the required expertise to play a leading, but not exclusive, role in representing customers in all regulatory processes. Partial funding - on a contestable basis - should continue for individual advocacy groups.
- A review of the Australian Energy Regulator is proposed for 2014. The Australian Energy Market Commission, the Australian Energy Market Operator and the new consumer representative body should also be reviewed by 2018 so that the scope for improvement in all of the main NEM institutions will have been assessed.
- At this stage, benchmarking - which compares the relative performance of businesses - is too unreliable to set regulated revenue allowances. Nevertheless, greater and more effective use of benchmarking could better inform the regulator's decisions.
- There is no evidence of insufficient capacity in the interconnectors carrying power between jurisdictions, as is sometimes alleged. In fact, they are sometimes underutilised because of perverse incentives and design flaws created by the regulatory regime. Changes to the National Electricity Rules should address these problems.
- In considering the benefits for consumers, it is important not to blame network businesses for the current inefficiencies. Mostly, they are responding to regulatory incentives and structures that impede their efficiency.
