The Australian Energy Regulator has issued its draft decision on Murraylink’s proposed charges to operate the Victoria–South Australia interconnector for ten years from 1 July 2013.
This service allows electricity to be transferred between South Australia and Victoria, ensuring all customers benefit from the lowest cost electricity generation at any given time.
This decision means Murraylink’s revenues will decline in real terms over the next decade, but impact on customers’ retail bills will be minimal.
"The combined effect of the AER decisions on ElectraNet and Murraylink charges is not expected to have any significant impact on customer bills. Transmission charges are a relatively small proportion of customer bills, and the draft decisions would only allow small changes in prices for these services." AER chairman Andrew Reeves said.
“Murraylink provides services to the national energy market by permitting customers access to the cheapest generation”, AER chairman Andrew Reeves said.
Murraylink sought total revenues of $158.8 million, based on its forecast operating and capital costs, including a rate of return on assets.
The AER has not accepted Murraylink’s forecast costs for this period and has set revenues of $130.6 million, 17.8 per cent below Murraylink’s proposal.
“The most significant driver of the difference between Murraylink’s proposal and the draft decision is a 150 basis point reduction in the allowance for financing costs, reflecting movements in the nominal risk free rate and the cost of debt. These financing costs are based on indicative numbers and will be updated for the final decision,” Mr Reeves said.
Lower allowances for operating and capital expenditure are also contributing factors.
Since beginning operation in 2002, Murraylink’s costs have been largely operation and maintenance of its 180km underground line, with very little capital expended. For the next ten years, the AER has approved opex of $34 million to ensure continued operation of the link in sound working order.
“The decision ensures sufficient funding to enable Murraylink to continue to meet its reliability requirements and transfer capacity obligations to the market as a whole”, Mr Reeves said.
The AER also reduced Murraylink’s proposed ten year capital expenditure by half, to $7.3 million, as original forecasts were deemed above those necessary for future asset replacement.
Background
What is an 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 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.
Murraylink submitted its proposal to the AER on 31 May 2012. The AER’s draft decision has rejected Murraylink’s revenue proposals. The AER expects its draft decision will have a minimal impact on electricity prices for customers.
AER price review–impact on customers
Murraylink connects transmission networks to allow electricity to be distributed across states and regions. This is a critical part of providing a national electricity service and form part of the overall costs of supplying electricity to customers. 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.
Murraylink started operation as an unregulated market network service provider, earning revenue from the difference between Victorian and South Australian regional electricity market prices but has since chosen to be subject to regulation.
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.