FAQ – Merits review of Australian Energy Regulator determinations

A number of electricity and gas networks, and the consumer group the Public Interest Advocacy Centre, have announced they will challenge a set of network determinations recently made by the Australian Energy Regulator. The decisions being appealed set regulated revenues for gas and electricity distribution networks across New South Wales and the electricity distribution network in ACT.

Q: Why are network businesses and consumer appealing?

Both network businesses and consumers say the AER has made a range of errors in properly applying the regulatory framework set out in the National Energy Laws and Rules.

A significant focus of the appeals is whether the decisions allow sufficient revenue to efficiently provide a safe, reliable network service which is consistent with the long-term interests of consumers.   Both the network companies and the consumer group have also challenged the rigour of the regulator’s development and application of “benchmarking modelling” in the decisions.  While energy networks strongly support the use of benchmarking as a regulatory tool, the appeals by all parties are based on a view that the regulator has taken an approach which breaches the rules.

Another focus of appeals is the appropriate rate of return to provide on new and existing network investments. Network businesses consider that the AER’s estimated rate of returns, and the way it reaches its estimates, does not provide a return adequate to underpin the long-lived network infrastructure investments that are necessary to continue to efficiently deliver safe and reliable energy services.

Q: Why are these appeals particularly important?

In the decisions being appealed, the AER is applying a recently revised set of rules and approaches to setting allowances, meaning that the reviews will serve to usefully define how to best apply these new rules. Tribunal rulings provide guidance on how regulators can fairly and reasonably interpret and apply the rules, which reduces uncertainty and the potential for future disputes. Access to merits-based review also provides a critical level of investor confidence that underpins major private sector investment in assets with lives of 30-50 years.    

Q: How are these appeals decided?

Reviews on the merits of AER decisions are heard by the Australian Competition Tribunal, a specialist tribunal drawing on legal, economic and technical experts. The Tribunal is required to establish whether the AER decision meets the relevant National Electricity or Gas Rules, and whether there is a materially preferable decision that better serves the long-term interests of consumers.

That is, at all times the appeal body is required to take into account what is the best outcome for current and future consumers. Once the Tribunal has made its decision, it can confirm the original decision, change the decision, or give it back to the regulator to remake.

Q: How will these appeals affect everyday consumers – will they lead to higher prices in the future?

The Tribunal can only change an AER decision where it is satisfied that a different outcome would better serve the interests of consumers. Due to falling financing costs and lower forecast demand, most network business were already proposing lower network charges. While the outcomes of the appeals will affect how much network charges fall in real terms, they are unlikely to result in real price increases. 

Importantly, if regulatory determinations do underfund ongoing network investment and operations, this can result in higher costs in the future. This outcome risks locking consumers into an unstable cycle of rising and falling charges and network reliability.