18 October 2012 — The Productivity Commission has gone to town on the electricity networking regulation.
The report, Electricity Network Regulatory Frameworks, released today, was prepared for participants making submissions to the public inquiry into electricity network regulation.
However the Commission has used the report to highlight flaws in the system.
It found electricity prices had risen by more than 50 per cent in real terms over the past five years thanks to “spiralling network costs are the main contributor to these increases, partly driven by inefficiencies in the industry and flaws in the regulatory environment”.
The report said that while resolving benchmarking and interconnector problems was worthwhile, that was only as a component of a more fundamental, nationally-focused, package of reforms that addressed the major, interlinked regulatory barriers to the efficiency of electricity networks.
Those barriers included:
- a poor focus on consumers, despite their interests being the overarching objective of the regulatory regime
- inadequate demand management
- costly ways of achieving, and sometimes excessive, reliability requirements
- state regulatory arrangements and network business ownership
- the resourcing and capacity of, and structural arrangements for, the regulator, the regulatory rules, and the ability of the regulator to apply them.
“The overarching objective of the regulatory regime is the long-term interests of electricity consumers. This objective has lost its primacy as the main consideration for regulatory and policy decisions. Its pre-eminence should be restored by giving consumers much more power in the regulatory process,” the report said.
The Commission found that “some 25 per cent of retail electricity bills” was required to meet around 40 hours of critical peak demand each year.
“Avoiding this requires a phased and coordinated suite of reforms, including consumer consultation, the phased removal of retail price regulation, and the staged introduction of smart meters, accompanied by time-based pricing for critical peak periods.
“This would defer costly investment, ease price pressures on customers, and reduce the large hidden cross-subsidies from (often lower-income) people who do not heavily use power in peak times, to those who do.”
Another finding was that while reliability was critical to electricity networks, some consumers were forced to pay for higher reliability than they valued.
“Reliability decisions should be based on what customers actually want, rather than by prescriptive (sometimes politically influenced) standards,” the report said.
The report found state-owned network businesses had conflicting objectives but there was no evidence that these businesses outperformed their private counterparts in terms of efficiently meeting the long-term interests of their customers. Conflicting objectives also frustrated the effectiveness of incentive regulation for these businesses, the report said.
Other findings included:
- In progressing reform, the Australian Energy Regulator needs more resourcing, expertise, independence and accountability.
- The incentive regulation regime encourages businesses to build too much. Eliminating some obvious flaws would encourage more efficient investment.
- At this stage, benchmarking — which compares the relative performance of businesses — is too unreliable to set regulated revenue allowances. Nevertheless, greater and more effective use of benchmarking could better inform the regulator’s decisions.
- There is no evidence of insufficient capacity in the interconnectors carrying power between jurisdictions, as sometimes alleged. In fact, they are underutilised because of perverse incentives created by the regulatory regime. Changes to pricing rules address these incentives.
- The gains from a package of reforms are significant. While the gains from these reforms are large, they will not happen overnight — long-term investments and regulatory decisions have already been made. But future cost savings rely on reforms made now.
- In considering the benefits for consumers, it is important not to blame network businesses for the current inefficiencies. Mostly, they are responding to regulatory incentives and structures that impede their efficiency
The Commission also found the importance of the long-term interests of consumers — the objective of the national regulatory regime — had been under-emphasised.
“The ‘National’ in the NEM is also a work in progress — but progressing too slowly in the Commission’s view.
“State and territory governments, and their regulators, still play too large a role in setting reliability standards and in regulating retailing, and they also mandate other licence conditions for the network businesses.
“Additionally, they have various renewable energy policies that affect network businesses’ options for efficiently addressing emerging bottlenecks in their systems. They are the owners of network services in Queensland, New South Wales, Tasmania and, in part, the Australian
Capital Territory. They still own generators in New South Wales and Tasmania, and
retailers in Tasmania and the Australian Capital Territory.
“As a result, there is no nationally uniform regulation of network services in the NEM.”
See the Productivity Commission’s draft recommendations here.