On the 30 June 2016, the AER submitted a rule change request to the Australian Energy Market Commission (AEMC) proposing changes to the National Electricity Rules (the Rules) relating to reporting and planning requirements for replacement capital expenditure.
The planning framework in the Rules seeks to promote efficient investment outcomes. This is sought to be achieved, in part, by requiring network businesses to:
- undertake an annual planning review of their network and publish the results of their review in an annual planning report (APR)
- prior to expanding their network, conduct a public cost benefit assessment, known as the RIT-T in transmission and RIT-D in distribution, to identify the investment option which maximises net public benefits
The current framework provides limited transparency on network replacement decisions, as historically it has been considered that there are not likely to be viable alternatives to ‘like for like’ replacement. However, there have been recent changes which we now consider warrant an increased scrutiny on network replacement expenditure.
Replacement expenditure now comprises a larger proportion of total capital expenditure by network businesses, with replacement expenditure exceeding augmentation expenditure. Combined with stagnant electricity demand growth across the NEM and advances in energy storage and distributed generation technologies, there is a strong economic case in many instances for alternatives to like for like replacement.
This rule change proposal seeks to amend the planning framework to provide a greater focus on network replacement decisions by:
- requiring network businesses to include in their APR to provide information network asset retirement decisions and the development of credible options to address network limitations arising from a decision to retire a network asset
- introducing a new guideline on network asset retirement which will set out the classes of network assets which network businesses should report on in the APR for retirement and replacement decisions. This guideline will be developed and published by the AER in accordance with network consultation procedures in the Rules, and
- extending the application of the RIT-T and RIT-D to replacement expenditure
The rule change proposal also seeks to make minor amendments to the transmission APR and RIT-T provisions in the Rules to mirror provisions introduced in the Distribution APR and RIT-D in the Distribution Network Planning and Expansion Rule Change.
We consider that the proposed amendments are necessary to ensure the planning framework continues to promote efficient investment outcomes.
AER proposed rule change - AER proposed amendments to Chapter 5 - 30 June 2016
Consultation paper
On 13 January 2017 we provided a submission in response to the AEMC consultation paper. Our submission supports the rule change proposal which would further promote efficient network investment decisions. One of the key changes our rule change proposes is for increased transparency, through the Annual Planning Reports (APR), of asset de-rating and retirement decisions which give rise to replacement projects. The submission also addresses the concerns raised by some of the submissions to the AEMC consultation paper regarding the increased regulatory burden on network businesses with additional reporting requirements. Consistent with the key energy policy objectives, we consider that any additional regulatory burden would be outweighed by the benefits of this rule change in increasing the transparency of network investment decisions.
Improving the quality of the information in APRs has been a focus of the AER since 2014, and is consistent with:
- the recent rule change that requires the AER to prepare a distribution APR template to ensure Distribution Network Service Providers provide information to the market in a consistent format by 30 June 2017.
- the AEMC’s draft rule regarding transmission planning and connection arrangements, proposing that the AER develop a guideline to support consistency across Transmission APRs.
Draft determination
On 6 June 2017 we provided a submission in response to the AEMC’s Draft Rule Determination.
Our submission supports the proposed amendments made by the AEMC which would extend the operation of the regulatory investment tests for transmission and distribution to replacement expenditure. We consider that this change ensures more transparency around replacement expenditure decisions and supports more efficient decision making.
Our submission also commented on the need to ensure that the transitional arrangements associated with the rule are limited to allow timely introduction of the rule.
More information
More information on AER's rule change proposal can be found on the AEMC website