The Australian Energy Regulator today issued its draft decision on determinations to apply to the electricity distribution networks in NSW, owned and operated by Country Energy, EnergyAustralia and Integral Energy, for the period 1 July 2009 to 30 June 2014.
These are the first draft distribution determinations made by the AER in respect of these networks.
Distribution networks move electricity from the high voltage transmission network to residential and business customers. Country Energy manages a distribution network across 95 per cent of the NSW land mass which serves more than 870,000 customers. EnergyAustralia supplies electricity to 1.4 million customers across the Sydney, Central Coast and Hunter regions. Integral Energy operates a network that services over 2.1 million people in Sydney's Greater West, the Southern Highlands and the Illawarra.
"The draft decision provides for $15 billion worth of investment across three NSW electricity distribution networks over the next five years, which represents an increase of around 90 per cent from the current level of $8 billion for the past five years," AER Chairman, Mr Steve Edwell, said.
Each of the businesses has proposed substantial increases in capital expenditures. The underlying need for this higher investment is different for each business:
- Country Energy has to augment its network in high growth areas as well as comply with enhanced licence conditions
- EnergyAustralia has established an asset renewal program and also has to comply with enhanced licence conditions
- Integral Energy has to augment its network to meet rapid local growth, particularly in Western Sydney.
"This investment expenditure and higher operating costs are likely to result in higher retail tariffs. The NSW distribution businesses have forecast that their network charges will increase the average residential bill for 2009–10 by around:
- $1.96 per week for Country Energy customers*
- $2.00 per week for EnergyAustralia customers**
- $1.70 per week for Integral Energy customers***
These price increases are indicative only, and are based on each businesses' regulatory proposal. Any retail price increases are likely to flow through in the second half of 2009. Actual prices will be determined by the AER in May next year following its final decision.
"The need for increased investment and higher input costs is consistent with the price increases proposed by the NSW distribution businesses. While consumers in NSW will face higher charges as a result of the increased investment, they will also benefit from a more reliable and secure network," Mr Edwell said.
Distribution charges represent about 40 per cent of the average cost of final delivered energy in New South Wales. The higher charges result from investment over recent years, the need to replace aged assets, mandated higher than forecast reliability standards, and the need to augment the network in response to continued growth in peak demand in NSW.
"Higher electricity charges are also being driven by peak demand for electricity which is increasing at a faster rate than overall energy consumption. The increased use for example, of air conditioning by customers requires new capacity to be built to meet peak demand. In NSW this is likely to occur on very hot summer days. Unfortunately this makes networks less efficient as this increased capacity must be paid for, even though it is under utilised for much of the year.
"To help offset this inefficiency, the AER's draft decision supports the development of innovative responses to rising demand on the network, through the application of two demand management incentive schemes," Mr Edwell said.
The cost of electricity sector labour has grown at 1.6 times the growth of general labour costs across the economy during the past decade, and this is having an impact on network operating costs. Material costs have also increased as a result of higher commodity prices. These trends are expected to continue during the next regulatory period albeit at a reduced rate.
Global financial conditions impact on electricity prices as they influence the borrowing costs of networks. While the global financial crisis is now putting downward pressure on official interest rates, margins on commercial debt are still above historical levels. The cost of capital used to determine the NSW distribution businesses' revenues will be set closer to the time of the final decision. If global financial conditions improve and commercial debt premiums decline this will be reflected in a lower cost of capital for the NSW distribution businesses and lower electricity tariffs for consumers.
The AER received a large number of submissions from councils on the cost and service level of public lighting. The draft decision sets out a new method to establish transparent and cost reflective charges for public lighting.
In making its draft decision, the AER took into account submissions from interested parties and advice from independent experts. These documents are available on the AER's website.
The AER invites written submissions in response to its draft decision, which close on 16 February 2009. The AER will hold pre-determination conferences in Canberra and Sydney on 8 and 9 December 2008, for the purpose of explaining its draft decisions and to receive oral submissions from interested parties. The AER will consider all issues raised by interested parties in response to the draft decision before issuing its final decision by 30 April 2009.
Background
Under the National Electricity Law (NEL) and the National Electricity Rules (NER), the Australian Energy Regulator is responsible for the economic regulation of electricity distribution services provided by distribution network service providers (DNSPs) in the National Electricity Market (NEM). Before 1 January 2008, the Independent Pricing and Regulatory Tribunal (IPART) was responsible for regulating the electricity distribution businesses in NSW and the ACT. IPART is an independent body that oversees regulation of the water, gas, electricity and public transport industries in NSW.
The current distribution regulatory control period expires on 30 June 2009.
The AER's principal task is to set the maximum allowed revenue that each DNSP can receive from the provision of direct control distribution services. The revenue determination for the NSW distribution businesses is subject to the transitional chapter 6 rules which are included at chapter 11 of the NER.
On 2 June 2008, Country Energy, EnergyAustralia and Integral Energy submitted regulatory proposals for the 2009–14 regulatory control period to the AER in accordance with transitional chapter 6 of the NER.
*Country Energy has assumed an average customer consumes 6 MWh per annum, with 4 MWh consumed on a continuous supply and 2MWh off peak hot water.
**EnergyAustralia has assumed an average customer consumes 4.7 MWh per annum excluding controlled load.
***Integral Energy has assumed an average customer consumes 6,000 kWh per annum.