AER proposes improved cost-benefit analysis for network investment

A key test applied to large scale network investments is set to become more robust, efficient and timely after the Australian Energy Regulator (AER) announced improvements to its Regulatory Investment Test (RIT) guideline.

“The cost-benefit focus of the RITs is critical for promoting efficient investment in electricity networks. Good guidance helps network businesses apply a robust, consistent and transparent analysis,” said AER Chair Paula Conboy

“It also supports this critical aspect of effective regulation to be undertaken in a timely and efficient way,” Ms Conboy said.

The proposed new guideline follows the Council of Australian Governments Energy Council’s (COAG EC’s) review of the test for transmission networks, the RIT-T, last year.

Improvements to the guideline, recommended as part of that review, have been included accounting for option value, policy developments and high impact, low probability events.

 “We are providing clear guidance to support robust processes and strong analysis in the first instance. This will reduce the amount of time taken by networks to finalise processes and reduce disputes,” said Ms Conboy.

Following an AER request for changes to the rules, RITs now apply to large replacement projects, rather than just augmentation projects

“Network businesses are now applying a transparent cost–benefit analysis to their large replacement projects. This is a big improvement. Our new guidance will be important for supporting clear and robust analysis of replacement expenditure,” said Ms Conboy.

The proposed changes to the RIT guidance support a system-wide approach to planning for the National Energy Market. They have been developed to complement the recommendations of the Australian Energy Market Operator’s proposed integrated system plan (ISP) by identifying which transmission upgrades and interconnectors should be provided through regulated revenues.

Further work on strengthening the role of the ISP, cost-benefit tools such as the RIT and the way they are integrated is being undertaken by the Australian Energy Market Commission and co-ordinated by the Energy Security Board. The AER is requesting stakeholder input on its proposed changes. Submissions close 7 September 2018.

About the AER

The Australian Energy Regulator (AER) works to make all Australian energy consumers better off, now and in the future. 

We regulate electricity networks and covered gas pipelines, in all jurisdictions except Western Australia. We set the amount of revenue that network businesses can recover from customers for using these networks.

We enforce the laws for the National Electricity Market and spot gas markets in southern and eastern Australia. We monitor and report on the conduct of energy businesses and the effectiveness of competition.

We protect the interests of household and small business consumers by enforcing the Retail Law. Our retail energy market functions cover New South Wales, South Australia, Tasmania, the ACT and Queensland. We do not set the prices consumers pay.

We drive effective competition where it is feasible and provide effective regulation where it is not. We equip consumers to participate effectively, including through our Energy Made Easy website, and protect those who are unable to safeguard their own interests. We use our expertise to inform debate about Australia’s energy future.

About the Regulatory Investment Tests

The cost-benefit focus of the RITs is a key part of the planning undertaken by network businesses relevant to investment decisions and draws on other planning outputs, such as the Australian Energy Market Operator’s proposed integrated system plan (ISP). The role of the RIT is to seek cost effectiveness for the consumer by increasing the transparency of individual investment decisions. It encourages network companies to consider a wide range of possible solutions to meet an identified network need. Finally, it provides a predictable framework that all market participants can understand and participate in.

A RIT assessment is necessarily focused on a particular project that will impact on consumer prices. The RIT therefore is tailored to individual, project-specific circumstances and takes local factors such as the cost of easements and other site-specific factors into account.

The national strategic plan in the form of the ISP and individual Transmission Network Service Providers’ (TNSP) planning activities both have important roles in determining transmission development, costs and consumer prices.

Issued date: 
27 July 2018
AER reference: 
NR 24/18
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