Our Ref:

Mr Sebastian Roberts 
General Manager 
Australian Energy Regulator 
GPO Box 560J 
Melbourne  VIC  3001

By email: aerinquiry@aer.gov.au

5 May, 2006

Dear Sebastian

Distribution Scoping Paper

The Public Interest Advocacy Centre (PIAC) is an independent, non-profit legal centre based in Sydney. Among our many areas of work is the Utility Consumers’ Advocacy Program (UCAP) that advocates for the interests of residential consumers in the energy and water industries. 

PIAC welcomes the release by the Australian Energy Regulator (AER) of the scoping paper for Gas and Electricity Distribution Regulatory Guidelines. We appreciate the difficulty faced by the AER in the timing of this release given the need to await decisions of the Australian Energy Market Commission (AEMC) and the Ministerial Council on Energy (MCE) while at the same time preparing its own work program. PIAC and our counterparts in the community sector also are affected by these factors in making decisions as to how we best can participate in important regulatory processes over the next six to twelve months. Accordingly, we are pleased that the AER has been able to give some indication of how it intends to proceed with its work in regulating electricity and gas distribution activities in the national energy market.

We endorse broadly the thrust of the scoping paper in relation to the timeline indicated by the AER and the assumptions or ‘starting points’ for consultation around the economic regulation of distribution. In particular PIAC notes the preference of the AER to proceed to a regulatory framework that encompasses incentive-based regulation and a building blocks approach. Our contributions to the consultations on the design of the regulatory framework for transmission functions has been based largely on an expectation that these principles would be common to both levels of energy network. Certainly consumer and community groups have become familiar with these approaches and consider they are widely accepted by all stakeholders and have a firm basis for continued use in energy regulation in Australia.

It is noted that the AER proposes to conduct separate processes for each of electricity and gas distribution. This appears to be a sensible approach. In general the view of PIAC is that it is desirable for there to be as much consistency as possible in the regulation of these two forms of energy. We do not believe this is precluded by the conducting of separate processes of consultation and decision-making. Indeed, we believe this approach should permit stakeholders to have a sharper focus on the important differences between electricity and gas networks.

The scoping paper touches on a number of elements of the regulation of distribution networks concerning which PIAC does not have a settled view at present. An example is the calculation of WACC on either a pre-tax or post-tax basis. In a number of such areas we believe there may be little material impact on small end-users arising from a final decision. If consistency with transmission networks is to be a key factor then it may be the case that there is little room for debate in relation to distribution. Nonetheless, PIAC looks forward to possible opportunities to explore these issues further with the AER.

PIAC will be especially keen to provide views to the AER in relation to many of the building blocks including some of the elements of the WACC. Cost allocation methodologies and the possible treatment of CAPEX are issues of considerable concern to PIAC and its stakeholders. Similarly, tariff setting is a critical issue for the regulatory framework as it raises a number of questions about the interests of consumers and social equity.

PIAC also is interested to discuss with the AER and industry stakeholders a number of the components of the regulatory framework that have a direct bearing on the conduct of economic regulation. We note that the scoping paper proposes the AER will deal with service standards in the ‘third phase’ of the consultation process and look forward to those discussions.

The scoping paper also makes clear the commitment of the AER to robust and effective consultation with all stakeholders interested in the regulation of electricity and gas distribution. PIAC looks forward to an open and constructive engagement with the AER on these matters.

Yours sincerely
Public Interest Advocacy Centre Ltd

Jim Wellsmore
Senior Policy Officer