Avoiding short-circuits in future network cost recovery debates

Garth Crawford, Executive Director – Economic Regulation

Yesterday the Energy Networks Association launched its Research Paper Future Network Cost Recovery: Regulatory and policy options. The paper examines the impacts of evolving markets, technologies and patterns of demand on traditional cost recovery approaches that have remained essentially unchanged for around two decades.

There does not seem a lot of argument from anybody that the energy market is changing, and that just as in other markets facing disruption, these changes have real implications for how and what we regulate.

However, other important elements of the paper seem to have been poorly reflected in some of the initial commentary around the points raised in the analysis.

For example, it has been suggested that ENA is “pushing” or “recommending” the option of making network customers pay regardless of their connection to the grid, or even arguing for special tax privileges. A careful reading of the executive summary shows these suggestions are just wrong, and are inversions of the central recommendation of the research paper.

To be clear, the option the paper actually recommends would mean that current and future consumers would pay not one dollar more than currently allowed for. In economists jargon, it would be ‘net present value’ neutral. This is already a guarantee locked into the rules. To the extent we can take advantage of the historically low financing costs that now exist, our suggested option could mean consumers could pay less over time.

The paper seeks to transparently outline all the options suggested by current economic regulatory theory and practice, and actually supports the more active use of existing regulatory cost recovery rules. It concludes that using this existing tool is the best option to take forward, once the options are considered from the perspective of the long-term interests of consumers.

Critically, these interests include the interests of consumers in ongoing investment necessary to connect and provide market access to large and small renewables technologies and exciting energy storage options, as well as to reliably serve households and businesses. The ability to access and deploy low cost financing to underpin new and existing assets serving these needs is a key strength of the existing regulatory framework.

The research paper is explicitly intended to open a conversation. But conversations need to be based on facts, not misrepresentations. Contrary to claims made, the recommended proposal is to use the current rules, not change them.

Many energy commentators frequently criticise the quality of policy and regulatory debates in the Australian energy sector. ENA has sought to put options on the table that international commentators and other regulators are already debating. Consumers will not benefit from participants in legitimate regulatory policy debates inverting each others actual positions, or assuming away the challenges and complexities of ensuring tomorrow’s grid delivers for all consumers.

Twitter: @garth_crawford