The high cost of energy networks can make it efficient to have a single supplier of network services in a particular geographic area, leading to a natural monopoly industry structure.
The networks are regulated to manage the risk of monopoly pricing, where a business can charge higher prices or provide poorer services compared with the situation in a competitive market.
The AER is responsible for the economic regulation of electricity networks in the National Electricity Market (covering eastern and southern Australia) and gas pipelines in jurisdictions other than Western Australia and Tasmania. The AER is committed to applying consistent and transparent regulatory approaches to encourage the businesses to undertake efficient investment and provide reliable services to consumers.
The National Electricity Law and Rules set out the regulatory framework for electricity networks. Regulated network businesses must periodically apply to the AER to assess their revenue requirements (typically, every five years). Chapters 6 and 6A of the National Electricity Rules lay out the framework that the AER must apply in undertaking this role for distribution and transmission networks respectively. The frameworks require the AER to set a ceiling on the revenues or prices that a network can earn or charge during a regulatory period.
In determining the revenues or prices that a network business can charge, the AER must forecast the revenue requirement of a business to cover its efficient costs (including operating and maintenance expenditure, capital expenditure, asset depreciation costs and taxation liabilities) and provide a commercial return on capital.
The National Gas Law and Rules set out the regulatory framework for gas pipelines. Economic regulation provisions apply only to ‘covered’ pipelines. Various tiers of regulation apply, based on competition and significance criteria.
Full regulation requires a pipeline provider to periodically submit an access arrangement to the AER for approval. An access arrangement sets out the terms and conditions under which third parties can use a pipeline. It must specify at least one reference service likely to be sought by a significant part of the market, and a reference tariff for that service. The AER assesses the revenues needed to cover efficient costs and provide a commercial return on capital, then derives reference tariffs for the pipeline.
Under light regulation, the pipeline provider determines its own tariffs. The provider must then publish relevant access prices and other terms and conditions on its website. In the event of a dispute, a party seeking access to the pipeline may ask the AER to arbitrate.
Some pipelines are ‘uncovered’, meaning that they are not subject to economic regulation.
The regulatory framework anticipates the potential for market conditions to evolve, and includes a mechanism for reviewing whether a particular pipeline needs economic regulation, and the extent of that regulation.
The AER's 2013 AER Stakeholder Engagement Framework commits us to clearly communicating the purpose and objectives of, and the role of stakeholders in, an engagement process. This promotes transparency in our regulatory processes and decision making.
As such, the AER has released a network revenue determination engagement protocol. Although the engagement protocol is a new initiative, it reflects existing practice for the most part. In publishing this document, we aim to create a predictable engagement experience for all stakeholders involved in our network revenue determination processes.
The network revenue determination engagement protocol explains our 'principles of engagement', and what they mean in practice for how we engage with the network businesses and all other stakeholders on these regulatory processes. Further, the AER's consultation requirements under the National Electricity and Gas rules are outlined—with examples of how we will fulfill them.
As the regulator of monopoly network and pipeline businesses, the AER requires information about a networks' revenues, prices, expenditures, operations and service delivery. The AER collects, analyses and reports on information provided by regulated businesses about their past, present and future performance.
The AER has published an Explanatory statement – Expenditure forecast assessment guideline (November 2013) on our approach to data collection, analysis and disclosure for electricity businesses. The guideline describes the types of information being collected, how we will use it, and how we will share it with stakeholders. Expected changes to the way in which we collect information are also discussed. Our Explanatory statement – Confidentiality Guideline provides further information on how we intend to share information from regulated businesses with other stakeholders.
The AER aims to increase consistency in the approach to information management across the electricity and gas sectors; for example, we have committed to a more consistent approach to the publication of information from regulated businesses.