The Energy Regulation and Markets Review - Stikeman Elliott

Australia
The AER’s regulatory approach involves determining a revenue cap for each
transmission business, which is the maximum revenue a business can earn during the
regulatory period. The AER applies a building block model to determine the revenue
that a transmission business needs to cover its efficient costs and a commercial return to
the business. The building blocks cover:
a operational and maintenance expenditure;
b capital expenditure;
c asset depreciation costs;
d taxation liabilities; and
e a commercial return on capital.
The AER will also determine whether a service target performance incentive scheme
(service standards scheme) or efficiency benefit-sharing scheme will apply to that
business:
a an ‘efficiency benefit-sharing scheme’ encourages transmission businesses to
achieve efficient operating and maintenance expenditure in running their
networks by sharing efficiency gains between businesses and customers (through
lower prices); and
b a ‘service target performance incentive scheme’ encourages businesses to maintain
or improve network service performance and thus balances the efficiency benefitsharing
scheme so businesses do not reduce costs at the expense of service quality.
The regulatory framework for distribution businesses is similar to the framework for
transmission businesses but there are differences. In particular, where the AER is the
regulator (state and territory regulators in Western Australia and the Northern Territory
still regulate distribution businesses in those jurisdictions), the process commences when
the AER releases a draft framework approach for a network.
Unlike transmission businesses, which must all be subject to a revenue cap,
distribution businesses must be subject to some form of control mechanism, but the
AER may choose the form of incentive. In addition to revenue and price caps, the
following approaches are available in Australia and have been used by regulators in some
of the jurisdictions or networks:
a revenue yield models, which link the revenue a business may earn to the volume
of electricity sold;
b weighted average price caps, which set a ceiling on distribution prices but allow
flexibility in individual tariffs within that ceiling; and
c schedule of fixed price caps, whereby a list or schedule of prices is set for each
individual service that the business provides.
When using any of the above control mechanisms, the AER is also required to forecast
the revenue requirement of the business over the regulatory period. This is achieved using
a building block model, with building blocks covering:
a investment forecasts;
b the operating expenditure allowances that a benchmark distribution business
would require if operating efficiently;
c asset depreciation costs;
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