Australian Competition Tribunal decision – electricity networks

Regulatory News

Mar 06
Australian Competition Tribunal decision – electricity networks

On 26 February, the Australian Competition Tribunal (ACT) handed down its decision on applications made by Ausgrid, Endeavour Energy, Essential Energy, ActewAGL and the Public Interest Advocacy Centre (PIAC) against recent price determinations made by the Australian Energy Regulator (AER) for the distribution network service providers.

The gas and electricity network companies appealed on the basis that greater revenue should be recovered from customers through electricity and gas bills.  The PIAC also appealed the AER’s decisions but to seek lower revenues to be recovered from customers.

Appeals were made against AER decisions on:

  • operating expenditure forecasts;
  • the values of gamma and beta as part of cost of capital calculations;
  • arrangements for transitioning to a ‘trailing average’ approach in calculating the cost of debt (also for cost of capital calculations);
  • assumptions the AER made in relation to Efficiency Benefit Sharing Schemes and Service Target Performance Improvement Schemes;
  • metering; and
  • application of the ‘x-factor’ to smooth revenues over the regulatory period in order to reduce price shocks for customers.

The ACT found no grounds for appeal in the AER’s decisions on Efficiency Benefits Sharing Scheme, beta (return on equity) and some aspects of the metering decisions (one error the AER had already noted).

The ACT accepted some aspects of the appeals, in particular in the areas of debt and the methodology to determine operating expenses.

The AER was instructed to make operating expenditure decisions again and to include a broader range of modelling and benchmarking against Australian businesses, including a ‘bottom up’ review of network service providers operating cost forecasts.  In amending its decisions on operating  cost forecasts this would also address concerns with some metering cost forecasts and Service Target Performance Improvement Schemes.  Reassessing operating cost forecasts as part of the revenue ‘allowable’ over the regulatory period would also necessitate a reapplication of the ‘x-factor’.

The AER was also instructed to make its decisions using the service providers’ estimates of 0.25 for gamma, including determination of corporate income tax forecasts.  With regards adoption of transitioning to a trailing average approach, the ACT upheld the individual challenges from service providers and instructed the AER to have regard to these positions in making its decisions on the cost of capital.

Jemena and ATCO Gas Australia also have appeals in progress with the ACT at present.

Background:

The recent ACT decisions are based on a ‘limited merits review’ which involves a review of the papers presented at the hearing only.  The ACT is therefore somewhat restricted on the material it can consider in the review process.