Electricity transmission and distribution, gas pipelines and distribution networks (energy networks) are known as ‘natural monopoly’ industries. This means that any particular geographic area is most efficiently served by a single provider (as opposed to multiple, competing providers).
To manage the risk of monopoly pricing (that is, prices that are inefficiently high) the prices charged by energy networks are regulated. For the most part, first-instance pricing determinations are made by the Australian Energy Regulator (AER). The AER considers the network provider’s operating and capital expenses and commercial returns, and forecasts its revenue requirements. This in turn determines the network tariff charged through retailers to consumers.
Network pricing decisions are currently reviewable by the Australian Competition Tribunal. In 2012, a review commissioned by the Standing Council on Energy and Resources (SCER) found that the review framework was not delivering on its objectives in certain key respects. Of particular concern was the overly legalistic approach to review; the framework not adequately considering the views of all relevant stakeholders; and incentives being skewed in favour of network tariff increases.
On 14 December 2012, SCER released a Consultation Regulation Impact Statement (RIS), examining the options for reforming the current review framework. The changes examined include:
- establishing a new review body;
- introducing a new, single ground of appeal (based on a ‘materially preferable’ test); and
- requiring the tribunal to operate in a purely administrative manner.
The changes are expected to improve stakeholder engagement in the review process, particularly for consumer representatives. Other potential benefits of the proposed changes could include:
- better alignment of the review framework with the long-term interests of consumers;
- maintaining an appropriate avenue of appeal for parties affected by regulatory decisions; and
- more timely decision-making, at lower cost.
However, there are some uncertainties associated with the proposal, including those relating to: the transition to a new review framework; and whether the review body would be able to operate in a truly administrative manner (as opposed to the current approach which is seen as being overly legalistic).
The Consultation RIS seeks detailed information from stakeholders on the costs and benefits of the identified options. Consultation will close on 8 February 2013. The Consultation Regulation Impact Statement was prepared by SCER and assessed as adequate by the Office of Best Practice Regulation.