AER’s final decision on EnergyAustralia’s public lighting services proposal

The AER released its final decision on EnergyAustralia’s public lighting services in accordance with the directions of the Australian Competition Tribunal in April.

The final decision confirms the value of pre 1 July, 2009 assets as $140.9 million. In making this decision the AER considered the points raised by local government councils, the principal customers of EnergyAustralia’s public lighting services, that this valuation is substantially greater than the value established in the AER’s April 2009 decision.

This final decision by the Australian Energy Regulator (AER) on EnergyAustralia’s public lighting charges (and prices) has been made in accordance with the directions of the Australian Competition Tribunal. The decision replaces the AER’s April 2009 decision on Energy Australia’s alternative control (public lighting) services for the 2009-14 regulatory control period.

The asset value was revised after considering the need for regulatory consistency. According to the AER, it is mindful that this higher asset valuation will result in substantially higher charges for public lighting services as a consequence of the former state-based regulatory arrangement. While the Australian Competition Tribunal did not find error with the pre 1 July, 2009 asset value established in the AER’s April 2009 decision, it did direct the AER to consider previous correspondence between EnergyAustralia and the Independent Pricing And Regulatory Tribunal of NSW, which was not before the AER when it made its April 2009 decision.

The AER also considered EnergyAustralia’s submission for maintenance charges above those provided for in the AER’s draft decision. The AER is not satisfied that this claim is prudent or efficient and establishes a maintenance charge slightly lower than the amount provided for in the draft decision. The reduction from the draft decision reflects advice from EnergyAustralia that an aspect of its earlier modelling of its maintenance costs was overstated.

The final decision also confirms the method for deriving the residual value of assets replaced early at the request of a customer. The AER recognises that the average assumed life of these assets may act as a disincentive to the early installation of energy efficient lighting but maintains that this methodology is necessary to achieve consistency with the previous regulatory arrangement.

The final decision also establishes an amount of $11.4 million was under-recovered from public lighting customers in 2009-10. This is the additional amount customers would have paid had this final decision operated from 1 July, 2009. To minimise the price shock associated with the recovery of this additional amount this charge has been smoothed over the remaining years of the regulatory control period.

From its review of public lighting services in NSW, the AER found that pricing schedules did not reflect the actual cost of providing the service, that some customers were cross subsidising others, the modelling was generally based on broad assumptions and that no service providers had comprehensive records on their public lighting assets. To overcome these issues the AER considered it was necessary to implement new regulatory arrangements.

The regulatory arrangements that have been established in this decision (and in the AER’s April 2009 decision) are aimed at developing more cost reflective prices for new assets, improving transparency and allowing greater choice over the service provided. The approach quarantines assets constructed before 1 July, 2009 and has established an asset base and remaining lives for each customer’s assets. These assets will continue to be regulated under a building block approach until such time as the regulatory asset base is fully depreciated. Therefore, customers should see their charges for pre 1 July, 2009 assets decline over future regulatory control periods.

For assets constructed after 30 June, 2009, the AER has established an approach that is not dependent on volume forecasts, determined prices based on efficient labour and materials costs and required comprehensive asset information be provided to customers on a six monthly basis.
The prices that have been determined are price caps and thereby permit the incumbent network service provider or other service providers to provide the service at a lower cost. Through this approach the AER is seeking to encourage competition to develop in the provision of public lighting services and where effective competition emerges these services may no longer need to be regulated by the AER.