AER releases Victorian network price determinations draft and significant price variation guideline

The AER made its draft determinations on the regulatory proposals submitted by the Victorian electricity distributors, SP AusNet, Citipower, Powercor, Jemena and United Energy. The determinations cover the period 1 January, 2011 to 31 December, 2015 and set the revenues that the Victorian electricity distributors are able to recover for the provision of electricity distribution services.

The AER considers that capital expenditure should increase on average by around 16 per cent on actual expenditure in the current regulatory control period. Overall, the AER’s decision means total capex would be $3.4 billion, around 38 per cent (or $2 billion) less than that sought by the DNSPs.

According to the draft, Victorian DNSPs proposed increases in expenditure that significantly exceed what they have spent in the current 2006–10 regulatory control period and also compared to what was forecast in the current regulatory control period. Overall, the Victorian DNSPs expect that capital investment would need to rise by around 66 per cent compared to their actual spending in the current regulatory control period and operating expenditure would need to increase by 36 per cent on current levels in order to meet their operating and capital expenditure objectives of supplying network services in accordance with their obligations and meeting expected demand and changes to their underlying costs.

The factors governing this substantial increase appear similar to those raised by DNSPs in other jurisdictions, which include responding to higher peak demand from more energy intensive appliances, such as air conditioners, and the need to replace ageing assets in an environment of increasing input and material cost pressures. In addition, the Victorian DNSPs have highlighted the impact of climate change and its potential to result in an increased frequency of extreme weather events, which the Victorian DNSPs expect to become more evident in the forthcoming regulatory control period.

The AER’s investigation has found that the models and estimation techniques individually employed by all the Victorian DNSPs to develop their forecasts cannot be relied upon to give an accurate estimation of future needs. The AER considered the proposals for substantial increases in the volume of network build (augmentation and replacement) as compared to actual historical outcomes. This conclusion takes account of the impact of increases in peak electricity demand.

The Energy Users Association of Australia (EUAA) welcomed the draft determinations.

“This draft is good news for Victorian electricity users who were concerned that recent decisions by the AER had resulted in very hefty distribution price increases in New South Wales, Queensland and South Australia,” EUAA executive director, Roman Domanski said.

“If the draft decision is confirmed, it will provide a significant boost to Victorian energy users and the state economy. Users can be confident that they will be paying network prices that reflect reasonably efficiently incurred costs.”

According to the EUAA, this is in marked contrast to New South Wales, Queensland and South Australia, where “electricity users are paying for inefficiently incurred expenditure, and where this will be getting worse over the next four to five years”.

“The EUAA is especially pleased that the AER has accepted that the proven performance of the Victorian distribution businesses should guide decisions on future expenditure allowances. The Victorian distributors proposed much higher allowances of $5.4b (or 66 per cent more than the previous regulatory period). If the AER had accepted the distributors’ proposals, users would be paying prices that would be much higher than their efficient costs. Energy users want a reliable supply but do not want to pay over the odds for this.”

The Australian Energy Regulator (AER) published a guideline regarding significant price variations (SPVs) in June. The guideline outlines what constitutes a SPV, and notes the AER’s responsibility of producing a gas day report when the triggers are met.

Both the trade weighted market price and the value of ancillary payments will be monitored by the AER to fulfil this reporting function, which was previously held by VENCorp.

AER staff developed an options paper, which was circulated to stakeholders and discussed at a forum held in Melbourne in May 2010, after undertaking its own analysis of data collected since market start in March 2007. The forum was attended by representatives from Victorian Gas Market participants and AEMO. The representatives were given the opportunity to provide feedback, both during and after the meeting.

After considering stakeholder feedback, the AER has determined that a SPV occurs when the trade weighted market price published by AEMO on a gas day is more than three times the average price for the previous 30 days and the trade weighted market price is equal to or greater than $15/GJ. A SPV also occurs when the ancillary payment amount published by AEMO on a gas day is an amount payable or receivable which exceeds $250,000.

The AER expects the reports will be of interest to a wide range of parties including existing market participants, participants considering entering the market, policy makers, energy analysts and consumer groups.