The Australian Energy Regulator today issued its draft decision on the transmission determination to apply to TransGrid's electricity transmission network for the period 1 July 2009 to 30 June 2014. The determination sets the maximum annual revenue TransGrid can achieve from the provision of its network services.
TransGrid operates the high voltage electricity transmission system throughout New South Wales. It transmits electricity across the state through 12,489 kilometres of high voltage transmission lines and cables. TransGrid's system is interconnected with the Victorian and Queensland transmission systems.
TransGrid has proposed significant capital expenditure over the next five years to undertake improvements to the transmission network to ensure it remains secure and consistent with NSW government reliability standards.
"In part, this is required to meet higher summer energy demand for air conditioners, and to replace obsolete equipment needed to maintain network performance," AER Chairman, Mr Steve Edwell, said. "TransGrid's transmission charges will need to be increased to fund this greater network capacity.
"The draft decision provides for $2.4 billion worth of investment in TransGrid's electricity transmission network over the next five years, which represents an increase of more than 70 per cent from the current level of $1.4 billion for the past five years. A further investment allowance of $1.2 billion is provided should certain defined triggers occur.
"This draft decision will result in a 6.6 per cent annual increase in average transmission charges from 1 July 2009 or a real increase of 4 per cent per annum. Transmission charges represent about 6 per cent of the average cost of final delivered energy in NSW, and will add approximately $4.00 to the average residential customer's annual bill of $983.
"The higher charges are also the result of significant growth in the cost of electricity sector labour, which has grown at 1.6 times the growth of general labour costs across the economy during the past decade. Material costs have also increased as a result of higher commodity prices. These trends are expected to continue during the next regulatory period albeit at a reduced rate.
"Higher electricity charges are also being driven by peak demand for electricity increasing at a faster rate than overall energy consumption. The increased use for example, of air conditioning by customers requires new capacity to be built to meet peak demand. In NSW this is likely to occur on very hot summer days. Unfortunately this makes networks less efficient as this increased capacity is then under utilised for much of the year and makes networks more costly to operate.
"To help offset this inefficiency, the AER's draft decision includes an allowance for TransGrid to support demand management initiatives."
Global financial conditions impact on electricity prices as they influence the borrowing costs of networks. While the global financial crisis is now putting downward pressure on official interest rates, margins on commercial debt are still above historical levels. The cost of capital used to determine TransGrid's revenues will be set closer to the time of the final decision. If global financial conditions improve and commercial debt premiums decline this will be reflected in a lower cost of capital for TransGrid and lower electricity charges for consumers.
The AER continues to apply a service standards regime to TranGrid's transmission network. This will ensure that it has effective incentives to maintain and improve its service performance for customers. In addition, for the first time the AER is providing a financial incentive for TransGrid to minimise the market impact of network outages on customers in the national electricity market.
In making its draft decision, the AER took into account submissions from interested parties and advice from independent experts. These documents will be available on the AER's website.
The AER invites written submissions in response to its draft decision, which close on 16 February 2009. The AER will hold a pre-determination conference in Sydney on 9 December 2008 for the purpose of explaining its draft decision and to receive oral submissions from interested parties. The AER will consider all issues raised by interested parties in response to the draft decision before issuing its final decision before 30 April 2009.
Under the National Electricity Law (NEL) and the National Electricity Rules (NER), the Australian Energy Regulator is responsible for the economic regulation of electricity transmission services provided by transmission network service providers (TNSPs) in the National Electricity Market (NEM). Before 1 July 2005, the ACCC was responsible for regulating TransGrid's revenues. TransGrid's current revenue cap expires on 30 June 2009.
The AER makes determinations according to chapter 6A of the NER in respect of certain services provided by transmission businesses. The AER's principal task is to set the revenues that a TNSP can receive from the provision of prescribed transmission services.
On 31 May 2008, TransGrid submitted a revenue proposal, proposed negotiating framework and proposed pricing methodology to the AER in accordance with chapter 6A of the NER.