REVIEW OF TRANSMISSION AND DISTRIBUTION PRICING
SUBMISSION TO NECA
by ACTEW CORPORATION March 1998
The NECA Review
ACTEW has reviewed the documents issued by NECA as part of its inquiry into
network pricing and regulation. ACTEW notes that NECA “ is likely to
recommend change to the current regulatory and pricing arrangements” as a result
of this review.
ACTEW is keen that NECA not lose sight of the important issue of pricing and
regulatory principles, in its quest to get the details right. Network pricing is a
complex matter with many vested interests. The current network pricing code
reflects the need for pragmatism in getting the national market process up and
running. ACTEW supported this pragmatic approach as a basis for moving
forward, whilst recognising there are many failings, some of which are
documented in the discussion paper released by NECA.
One major area in which the pricing and regulatory principles was never properly
addressed in the draft code of conduct, concerns the role and powers of the price
regulator. This also affects the degree of price prescription necessary in the code.
This matter is the main focus of ACTEW’s submission.
Price Regulation
The Hilmer Committee (1993) provided no ambiguity on the matter. They stressed
the need for light handed regulation as an outcome of their review into competition
policy. This position was later endorsed by the Industry Commission (1995).
Their view was that regulatory oversight should be confined to monitoring or
surveillance of prices, rather than setting prices.
The Hilmer committee made it clear that regulatory “oversight would provide for prices
monitoring or surveillance, but not prices control” (p289) and envisaged that “to the
maximum extent possible, pricing decisions should be made by individual firms rather
than regulators” (p277).1 The IC also concluded that price determination be left "in the
hands of GBE managers subject to appropriate surveillance and monitoring" p53. The
1
Hilmer Committee of Inquiry, National Competition Policy, August 1993
IC argued that adherence to the principle of light handed regulation "implies adoption of
restricted price surveillance and monitoring rather than price control mechanisms" p72.2
Yet a survey of the powers of the state and territory regulators across Australia reveals
that most have the ‘heavy handed’ power to set prices (actual prices or price caps).
There isn’t even a right of appeal for regulated entities to price determinations by
regulators, nor is this suggested anywhere in the network pricing part of the code.
Yet the price control power exercised by the state and territory regulators is at odds with
the powers of the ACCC, which will take on responsibility for transmission price
regulation in the near future. Under the Prices Surveillance Act, the ACCC only has the
power to monitor prices or give pricing recommendations (price surveillance).
To date, the regulated entities have been silent on this very important issue. The points
identified in the material prepared by NECA are really subservient to this issue - how
much power should regulator’s have and to what extent does this regulatory power
provide guidance on the level of prescription required in the code of conduct.
ACTEW’s View on Price Regulation
ACTEW supports light handed regulation, where the firm retains the power to set
network prices. However, ACTEW agrees this should be done within a regulatory
framework of pricing oversight, where price regulation takes the form of
monitoring or surveillance, but not price control. If price regulation is to take the
form of price control, then there must be a right of appeal available to the
regulated entity, as in the UK.
In keeping with this view, ACTEW believes the code of conduct on network
pricing should be much less prescriptive, focussing solely on network pricing
objectives and principles. In turn regulators must be accountable for their
decisions so that there is more of a balance of power between the regulator and the
regulated entity. This can be by way of a right of appeal (if the regulator has
price control powers) or by veto (if the regulator only has the power to recommend
prices). Either way, the regulator must face their responsibility in an open and
accountable way.
It should be noted the code does refer to light handed regulation, but only in terms
of the form of regulation. It is stated that CPI+/- X is light handed, when what
really matters is the Regulator’s power to enforce a determination, not the type of
cap imposed.
2
Industry Commission, Implementing the National Competition Policy: Access and Price Regulation, 1995
Outcomes of the Current Regulatory Approach
It is ACTEW’s contention that one of the outcomes of the price control approach
has been for the industry to develop a highly prescriptive pricing code to limit the
power of the regulator. In ACTEW’s view, this is a case of fixing one problem
with another, without recourse to the principles.
In effect, the code attempts to lock in a set of pricing outcomes for network owners
by specifying in detail the principles to be taken into account in setting price caps
and guidelines for cost allocation and price setting. This appears to have been an
attempt to reduce their risks (to a fall in business value particularly) and does this
under the veil of independent price regulation.
The NGMC itself appeared confused on the issue, arguing that a prescriptive code
for network pricing would safeguard the interests of consumers given the natural
monopoly characteristics of network businesses. They argued that prescription
would provide price stability, regulatory certainty and transparency.3 In so doing,
they were effectively arguing that price regulators couldn’t be trusted to deliver in
these areas.
It is ACTEW’s belief that a less prescriptive code and much more light handed
regulation (such as price surveillance) would provide a far better model than the
muddled and inconsistent approach adopted to date. It would also make the
transition of network transmission prices in the future to the ACCC, compatible
with the current federal price regulation regime.
Code Prescription and Distribution Price Regulation - A NSW Case Study
It is worth considering network pricing outcomes under the current approach to see
how the present regime works. ACTEW has documented the situation in NSW,
where the NSW price regulator has price control powers and the NSW distributors
have no right of appeal to the price determination. This case example is provided
for information only, and should not in any way be perceived as a criticism,
implicit or otherwise, of the work of the NSW price regulator.
Under the present operating regime, it would be expected that regulatory outcomes
for the NSW distributors would be relatively equal.
NGMC, Rationale for application of “CPI minus X” regulation of transmission charges in the National
Electricity Market, December 1995, p.12
3
Yet in NSW we can observe that one of the distributors (referred to as A) is treated
very differently. This particular distributor (A) maintains relatively low network
charges for large commercial and industrial demand customers and relatively high
charges for small, ‘captive’ domestic customers. A’s prices have been compared
to the average of B,C and D’s in the following comparison.
28%
1%
NSW
Average
(B,C,D)
Domestic
General
LVD
HVD
-18%
-12%
A’s network charges to domestic customers are 28% higher than the average of the
other three (B,C and D) while its prices to big customers are up to 18% lower. In
the absence of significantly different economic costs of network supply, this
outcome is open to question.
This would appear to provide A with a real but subtle competitive network
advantage. A is less likely to risk losing its big customers that may be capable of
network by-pass. These customers would also have less incentive to seek a lower
negotiated network price than they would in the jurisdictions of B,C and D.
The main point of this example is in relation to pricing power of the regulator and
the degree of price prescription in the code. The supporters of code prescription
would argue for more prescription on cost allocation and price setting to reduce the
scope for such inconsistencies. However, ACTEW would contend that less, not
more regulation would prevent such outcomes. A distributor that was able to
appeal against (or ignore) a determination, particularly in the light of evidence re
treatment of others, would help ensure regulators were more focussed on outcomes
and much more accountable for their decisions - leading to a balancing of power
and better pricing outcomes in the first place.
Summary and Conclusion
At present the NEM code of conduct implicitly endorses the need to give network
pricing regulators full power to determine network prices, both for transmission
and distribution. This is backed up by regulatory legislation in NSW, Vic, and
ACT which gives the regulator price control power. There is not even any
provision for a right of appeal by the regulated entity. This is clearly inconsistent
with the principle of light handed regulation endorsed by COAG and laid down in
the competition principles agreement. It is also inconsistent with the powers held
by the future regulator of network prices, the ACCC, which (appropriately) does
not yet have price control powers.
The disparity between the regulatory price principles which require a genuine light
handed approach, and the actual outcomes in the code of conduct and in
state/territory regulatory legislation is a matter that warrants the highest priority in
the NECA review.