ACCC's plan to lower network costs for consumers

In brief

The ACCC's Retail Electricity Pricing Inquiry Final Report includes a number of recommendations to lower network costs for consumers. We take a look at the ACCC's concerns, and recommendations for reform.

Background

In its Retail Electricity Pricing Inquiry Final Report (Final Report), the ACCC:

• estimates that network costs make up 43 per cent of the overall costs that are passed through to electricity consumers;
• recommends that state governments voluntarily write down the value of network business assets and provide consumer rebates; and
• makes recommendations intended to increase the take up of cost reflective network pricing, to better control network demand at peak times.

What are network costs?

Electricity network costs comprise transmission costs (which account for 12–25 per cent of network costs); distribution costs (70–80 per cent of network costs); and metering costs (which account for less than 5 per cent of network costs, except in Victoria, where they comprise 17 per cent).

Under the current regulatory framework, the Australian Energy Regulator (AER) determines the maximum revenue network businesses can recover from customers each year based on a level of return (the weighted average cost of capital) on the networks' Regulatory Asset Bases (RAB), with an allowance for depreciation, operating costs and tax.

In its Final Report, the ACCC noted that the collective RAB of network businesses across the NEM had increased in real terms by 75 per cent from 2006 to 2017, and that the resulting increases in network prices were the main historic driver of retail price increases over that period.

The ACCC's concerns about network over-investment

The ACCC stated that, under the current regulatory framework, the AER has a limited ability to review the efficiency of actual capital investment that is rolled into the RAB.

In making this finding, the ACCC referred to a Grattan Institute report from March 2018, which estimated that $20 billion out of a total $40 billion investment in network assets in the NEM from 2005 to 2017 could be considered 'excessive'. The ACCC stated that, while the precise measure of 'over-investment' is difficult to assess (as it depends on methodology and involves a degree of subjectivity), the Grattan methodology represents a reasonable estimate of the level of over-investment. The ACCC identified the following as key drivers of network over-investment:

• an increase in network reliability standards in Queensland and New South Wales following outages in 2004 (which were subsequently amended after being found to be overcautious);
• incentives in the regulatory framework that could be seen to encourage greater capital expenditure; and
• public ownership of networks in Queensland and Tasmania and, until recently, NSW, which the ACCC considered may have imposed a range of non-commercial obligations on network companies that may have led to over-investment and higher costs.

The ACCC noted that increased retail prices, partially resulting from increased network investment, may encourage consumers to seek electricity away from the grid. This in turn would increase the prices for the remaining customers, which in an extreme case could lead to a potential electricity 'death spiral'.

The ACCC recommends that state governments remedy this past over-investment through:

• voluntary government write-downs of the RAB for each state-owned network in NSW, Queensland and Tasmania (with appropriate assistance from the Federal Government); and
• the use of rebates on network charges to be paid by the distributor to the consumer, for any fully or partly privatised networks in NSW.

The ACCC estimates that these write-downs and rebates could result in at least $100 annual savings for average residential customers in those states. Additionally, the ACCC recommends the AER be given the power to monitor the effect of these write-downs and rebates on effective network charges that retail customers face.

The ACCC's concerns about accounting for stranded assets

Another concern the ACCC identified is that the current regulatory regime does not explicitly deal with an event where an asset may no longer be useful, or allow the AER to amend the RAB of a network business to reflect that such assets have become stranded. To address this concern, the ACCC recommends that the National Electricity Rules be amended to allow explicitly for a process whereby network assets may be considered 'stranded', and for the costs of those assets to be shared between users and networks.

The ACCC's concerns about the take up of cost-reflective network pricing

Network costs are largely driven by the value of network assets that are maintained to meet electricity demand on the network at peak times, which occur for only a few days each year. Cost reflective pricing is intended to provide customers with a price signal to reduce usage at peak times, and thus reduce the need for future network cost increases, which are ultimately passed on to the consumers. Additionally, cost reflective network charges are intended to distribute costs more fairly among consumers, by allocating the network charges based on the impact of each consumer upon current and future network costs.

Currently, tariffs for the vast majority of small customers are largely flat, where the tariffs are based on overall usage regardless of when the electricity is used. Cost reflective network tariffs can only be applied to customers with a smart or interval meter installed.

Although the AEMC cost reflective tariff rule change required networks to make cost reflective tariffs available to their small customers from 2017, the ACCC considered that adoption of cost reflective tariffs has been slow. Under the current arrangements, the retailer is either required to 'opt-in' for cost reflective network pricing to apply to a particular customer, or may opt-out of a cost reflective network tariff for a customer.

What is the ACCC proposing for cost-reflective network pricing?

The ACCC found that need for reform in this area is critical, given the changing pattern of electricity consumption, the growing inequity in how network costs are allocated among customers, and the disruption in technology that could change usage patterns and the role of the network.

The ACCC considered that demand tariffs, by which customers are charged based on their maximum demand during pre‑determined typical system peak times, represent an appropriate structure for the initial mandatorily assigned network tariffs, as they balance cost-reflectivity with simplicity and price certainty.

To accelerate the take up of cost reflective network pricing, the ACCC recommends that governments agree to mandatory assignment of cost reflective network pricing to retailers, ending current opt-in or opt-out arrangements. This mandatory assignment would apply to all customers with a smart or interval meter. The ACCC further recommends that retailers not be obliged to pass through the cost reflective network tariff in their customers' retail tariffs, but may choose to package these costs differently.

Given the potential bill shock that consumers could face, the ACCC recommends that, in addition to appropriate government communication campaigns, there be transitional arrangements, such as:

• a compulsory 'data sampling period' for consumers following installation of a smart meter;
• a requirement for retailers to provide a retail offer using a flat rate structure in certain circumstances; and
• additional targeted assistance for vulnerable consumers.

Where to from here?

Implementing these recommendations concerning network prices would require government action and collaboration. The Federal Government and state governments have not yet released their formal responses to the ACCC's Final Report.