Australia – Networks NSW Regulatory Determinations

30 July, 2015

 

In brief

Networks NSW is an unincorporated joint venture formed on 1 July 2012, comprising the NSW distribution network service providers Ausgrid, Endeavour Energy and Essential Energy. Each of Networks NSW’s distribution businesses are subject to Australian Energy Regulator (AER) determinations in relation to their revenue requirements. 

On 30 April 2015, the AER released its final decisions on Networks NSW’s distribution determinations for the 2014-19 regulatory control period. These decisions significantly reduced the amount that the NSW distribution businesses can charge their customers, impacting their revenue for the next 5 years. Networks NSW are appealing the final decisions on grounds that the AER has made material errors in determining revenue requirements for areas such as operational expenditure and the rate of return. The appeal will be heard by the Australian Competition Tribunal (Tribunal). The combined effect of the matters in dispute between Networks NSW and the AER are approximately $2.85 billion (Ausgrid), $1.169 billion (Endeavour Energy) and $1.716 (Essential Energy) in revenue from the proposals. This is a significant percentage (between 22- 25%) of the revenue sought.

A hearing is set for 21 September 2015 and is expected to take 2 weeks.

Background

All distribution network service providers in the National Electricity Market must apply every five years to the AER to assess their revenue requirements. In determining the prices that network service providers can charge, the AER forecasts the revenue required by the providers to cover their efficient costs.

Networks NSW is an unincorporated joint venture, formed on 1 July 2012, comprising the NSW distribution network service providers Ausgrid, Endeavour Energy and Essential Energy. Each of the service providers are required to individually provide revenue proposals to the AER.

Regulatory Process

As required by the National Electricity Rules (the Rules), each of the distribution businesses submitted to the AER on 30 May 2014 a regulatory proposal for the 2014-2019 regulatory period. Following receipt of the proposals, the AER assessed the proposed revenue allowances, including seeking and reviewing public submissions, and published a draft decision on 27 November 2014. In its draft decision, the AER rejected the revenue proposals, based primarily on three constituent decisions that it made in relation to the rate of return, operating expenditure and capital expenditure. 

In late January, Networks NSW submitted revised regulatory proposals which set out the revisions that Networks NSW made in light of the draft decision and further updated material. On 30 April 2015, the AER published its final decisions and distribution determinations. While the AER made small increases to the revenue allowances, Networks NSW contends that the final decision is affected by material errors. In particular, the final decision:

• imposes a new and radical benchmarking technique,
• fails to provide for Networks NSW’s legal obligations under Employment and Workplace Safety legislation,
• imposes a record low return on equity, and 
• endorses a new methodology for calculating the return on debt but postpones its full application for 10 years. 

The combined effect of these alleged errors is to disallow approximately $2.85 billion (Ausgrid), $1.169 billion (Endeavour Energy) and $1.716 (Essential Energy) in revenue from the proposals. This is a significant percentage (between 22- 25%) of the revenue sought.

Challenging the Final Determinations

Networks NSW and the ACT energy provider ActewAGL, filed applications for leave of the Tribunal to apply for merits review of the AER’s final decisions. These applications sought, among others, review of:

• the operating expenditure allowance,
• the cost of income tax and the decision on the value of imputation credits,
• the allowed rate of return on both equity and debt, and
• the exclusion of carryover benefits under the efficiency benefit sharing scheme.

In order for the Tribunal to set aside the final decisions, and remit them to the AER, the new decision must result in a materially preferable National Electricity Objective outcome. The National Electricity Objective requires the promotion of the efficient investment in, and efficient operation and use of, electricity services for the long term interests of consumers of electricity with respect to price, quality, safety, reliability and security. Networks NSW contended that the reduction in revenue will seriously reduce the service provider’s ability to safely and reliably distribute electricity to the long term benefit of consumers. It is therefore its contention that a materially preferable decision is achievable to the one delivered by the AER.

The Public Interest Advocacy Centre (PIAC) also filed applications in the Tribunal for the review of the AER’s final decisions. However, PIAC’s application contends that the AER final decision is too generous and allows the service providers to operate ineffectively during the regulatory period while maintaining what they consider to be unnecessarily high electricity prices for consumers. 

On 17 July 2015, the Tribunal gave leave to each of the Networks NSW businesses, as well as PIAC, to apply for merits review of the AER’s final decisions on the grounds and in respect of each of the matters referred to in the applications for leave.

The Victorian and South Australian electricity network service providers, along with Ergon Energy and the Minister for Industry and Science (Cth) have also applied to intervene in the proceedings. 

Outcomes

A 2 week hearing is set for 21 September 2015. The outcome of this hearing will be particularly significant as it represents the first review of an AER decision under the new Chapter 6 of the Rules which deal with the regulation of distribution networks. Of particular significance is:

• the increased emphasis on the National Electricity Objective through the requirement that the Tribunal only grant leave for review or vary a determination if to do so is likely to result in a materially preferable decision.  This new threshold was introduced with the intention of reducing the number of successful merits reviews, and it is expected that this hearing will provide guidance on how this threshold is to be met, and
• the new requirement by section 71R(1)(b) of the National Electricity Law that the Tribunal must take reasonable steps to consult with users and consumer interest groups who are not party to the review before making a determination.