The Australian Energy Regulator has issued its draft decision on ElectraNet’s revenue proposal for the five year regulatory period 1 July 2013 to 30 June 2018. ElectraNet is the principal electricity transmission network service provider in South Australia.
“South Australian consumers would not have to pay any more if this draft decision is implemented. This is because the transmission network component, which makes up about eight percent of retail electricity bills, would not increase over the next five years,” AER Chairman Andrew Reeves said.
The AER has not accepted ElectraNet’s forecast revenue of $1725.7 million ($ nominal) for the regulatory period. Instead, the AER has determined a total revenue cap of $1507.3 million ($ nominal) which is 13 per cent lower than ElectraNet's proposal.
The most significant drivers of the differences between ElectraNet’s proposal and the AER’s position are the expenditures required to operate and maintain the network, cost of new assets and the cost of capital required to finance assets.
The AER’s forecast efficient operating expenditure allowance is $397.6 million. This is 17 per cent lower than ElectraNet’s proposal and is more in line with its historical costs. ElectraNet forecast an operating expenditure requirement of $478.1 million ($ 2012–13).
The AER’s forecast capital expenditure allowance of $641.9 million ($ 2012–13) is 28 per cent lower than ElectraNet’s proposal of $894.1 million ($ 2012–13). The AER’s allowance reflects a lower forecast of peak demand for the regulatory period and therefore, less need to upgrade equipment. ElectraNet has been provided $304 million ($ 2012–13 dollars) to replace and refurbish ageing assets, which is nearly half of the total capital expenditure allowance.
“Overall, this draft decision, if finalised, captures the current lower costs of capital for financing assets and proposes sufficient expenditure allowances for ElectraNet to meet its reliability requirements and obligations to the market as a whole. We would expect that ElectraNet will respond to this draft with revised expenditure proposals,” Mr Reeves said.
ElectraNet can submit a revised regulatory proposal by 16 January 2013. The AER has invited submissions from interested parties on the draft decision. Those submissions close on 19 February 2013. The AER will then proceed to publish its final determination in April 2013.
Background
AER price review
Businesses fully regulated by the AER must submit a revenue proposal to the AER for approval. The AER conducts a price review on the business proposal to assess the maximum revenues needed to cover efficient costs and make a commercial return. Revenue proposals can impact on customers as the revenue an energy business earns is converted into a tariff or a price which is ultimately reflected in the price paid by a customer for electricity.
The AER will release a draft decision that accepts or rejects a business’s revenue proposal. Where the AER rejects the proposal it will outline required amendments to make the proposal acceptable to the AER and compliant with the National Energy Rules. Businesses can submit a revised revenue proposal prior to the AER making final decision.
ElectraNet submitted its proposal to the AER on 31 May 2012. The AER’s draft decision has rejected ElectraNet’s revenue proposal. The AER expects its draft decision will not increase electricity prices for customers.
AER price review–impact on customers
ElectraNet provides transmission services which are a critical part of providing electricity to customers in South Australia. Any increase in the costs of these services will ultimately be passed on to customers through electricity bills.
AER's role in electricity transmission and distribution
The AER regulates transmission and distribution networks in southern and eastern Australia. In electricity this involves setting the revenue and prices that a network business can earn from transporting electricity to customers. The National Electricity Law and National Electricity Rules set out the regulatory framework for this process.
In Australia, transmission and distribution networks are not competitive, partly due to the economic costs involved in duplicating infrastructure that would allow full competition amongst businesses. Economic regulation is required to ensure that participants in the wholesale and retail markets do not pay inefficient tariffs or receive poor service.
Electricity industry in Australia
The national electricity market comprises:
- wholesale businesses in which electricity is generated and sold to energy retailers
- transmission businesses that own and operate high voltage networks for the transportation of electricity from generators to major centres
- distribution businesses that own and operate low voltage poles and wires and sub-transmission assets such as substations that deliver electricity to households and business customers
- interconnector businesses that link state based transmission grids enabling the export and import of electricity between states and allows electricity generated in one state to be used by a consumer in another state
- retail markets in which retailers enter into contracts with the wholesale, transmission and distribution businesses to provide a service to consumers.