BULLETIN
SCER Response to AEMC Advice:
Consideration of Differences in Actual
Compared to Forecast Demand in Network
Regulation
BULLETIN FOUR / 31 MAY 2013
THIS DOCUMENT PRESENTS THE STANDING COUNCIL ON ENERGY AND
RESOURCES (SCER) RESPONSE TO THE AUSTRALIAN ENERGY MARKET
COMMISSION’S (AEMC) ADVICE OF 26 ARIL 2013 TITLED ADVICE TO
SCER: CONSIDERATION OF DIFFERENCES IN ACTUAL COMPARED TO
FORECAST DEMAND IN NETWORK REGULATION.
SCER welcomes the AEMC’s advice on the implications of differences between actual
and forecast demand within the regulation of transmission and distribution electricity
networks, the impact on consumers and how the Australian Energy Regulator (AER)
manages those implications. SCER recognises the AEMC’s advice builds on a
substantive body of work relating to energy markets, including:

the AEMC’s Rule Determination National Electricity Amendment (Economic
Regulation of Network Service Providers) Rule 2012 and National Gas Amendment
(Price and Revenue Regulation of Gas Services) Rule 2012 made on 29 November
2012;

the AEMC’s Rule Determination National Electricity Amendment (Optimisation of
Regulatory Asset Base and the Continued Use of Fully Depreciated Assets) Rule 2012
and National Gas Amendment (Optimisation of Regulatory Asset Base and the
Continued Use of Fully Depreciated Assets) Rule 2012 made on 13 September 2012;

the AEMC’s Rule Determination National Electricity Amendment (Distribution
Network Planning and Expansion Framework) Rule 2012 made on 11 October 2012;

the AEMC’s Power of Choice review;

the AEMC’s reviews into transmission and distribution reliability standards and
requirements;

the AER’s Better Regulation Program;

the Australian Energy Market Operator’s (AEMO) National Electricity Forecasting
Report 2012; and

the Productivity Commission’s draft report on its inquiry into Electricity Network
Regulatory Frameworks.
Background
Recent observations on demand suggest that, for the first time in the National Electricity
Market (NEM), there may be a sustained slowing of growth in peak demand and a
decline in average demand. This reduced demand has implications for the costs of
providing networks for consumers as network revenues are set, in part, on the basis of the
provision of capacity to meet forecast peak demand levels.
On 7 December 2012, the Council of Australian Governments (COAG) agreed that
SCER task the AEMC with providing advice on the merits of the AER considering the
difference between actual and forecast demand in the prior determination period when
undertaking the current determination. While recognising that this may be a complex
area, COAG requested that this advice be provided by March 2013, to provide sufficient
time for it to be considered and responded to in the mid-2013 SCER meeting.
In the context of this task, the AEMC was also requested to provide analysis around
which party bears the risk when forecasts are not realised and the difference of impact
depending on whether the regulatory control mechanism sets prices or revenue, and to
provide advice on whether any changes to the National Electricity Rules (NER) are
needed to ensure consumers receive the benefits of sustained reductions in demand. In
identifying options to address these matters, the AEMC was requested to have regard to
the need for actions to be proportionate, including the value of maintaining stability and
predictability in the regulatory regime, including ensuring sufficient investment certainty.
AEMC’s findings
The AEMC does not recommend any changes to the NER in light of the network
regulation rule changes made recently. The AEMC considers the incentive based
regulatory regimes for transmission and distribution network businesses are now flexible
enough to manage the impacts of differences between actual and forecast demand.
The AEMC notes the NER allows the AER to put financial measures in place that
encourage network businesses to adjust their capital programs in response to variations
between actual and forecast demand within the regulatory control period. These
adjustments will be reflected in prices during the subsequent regulatory control period.
How consumer prices are affected during the current regulatory control period depends
on whether the control mechanism is a revenue cap or a weighted average price cap
(WAPC). The NER provides the AER with the option to determine the form of control
mechanism to apply to distribution businesses. This allows the AER to consider factors
such as the predictability of demand forecasts and the appropriate risk sharing between
consumers and the network business when deciding the form of control mechanism.
Under the NER, transmission businesses are subject to a revenue cap. As transmission
charges are generally recovered by distribution businesses, the AEMC considers potential
benefits of a WAPC control mechanism for transmission businesses are more limited.
Consequently, the AEMC did not propose to change the requirement for revenue caps for
transmission businesses.
The AEMC noted that there are barriers to efficient pricing in the network tariff
structures. However, the AEMC considers that these are best addressed through its
recommendations in the Power of Choice review.
2
SCER’s response
SCER agrees with the AEMC’s conclusion that changes to the NER are not required at
this time. SCER recognises that, given the substantive nature of the National Electricity
Amendment (Economic Regulation of Network Service Providers) Rule 2012 and
National Gas Amendment (Price and Revenue Regulation of Gas Services) Rule 2012
made on 29 November 2012 and that these only take full effect towards the end of 2013,
to progress further changes to the economic regulatory frameworks at this stage would be
inappropriate.
Further, SCER considers that any already identified limitations in network tariff
structures are best addressed through the rule changes currently being progressed in light
of the recommendations in the Power of Choice review.
In addition, SCER notes the advice from the AEMC that other factors, such as planning
and security standards, may contribute to the impact of demand driven investments on
consumer outcomes. Consequently, SCER considers it essential to ensure that these
requirements are set in a transparent and economically robust process that takes into
account consumer expectations around the cost, quality, reliability and security of supply.
SCER notes that this principle is the basis for the work currently being progressed via the
AEMC's reviews of the national frameworks for transmission and distribution and
AEMO's Value of Customer Reliability work.
However, SCER considers that the responsiveness of network tariffs to sustained changes
in demand may be an issue requiring further consideration in the future, with the
changing patterns of electricity use. While the AEMC identified that demand related
capital expenditure is a small contributor to network tariffs applied to consumers as it is
recovered over the life of the asset, SCER recognises that there is the potential for
consumers to face higher than necessary prices over the long term if there is no incentive
for network service providers to both continuously adjust their capital works programs to
reflect the evolving demand outlook and share the benefits of sustained reductions in
demand, where it is due to consumer actions in addition to their own business decisions.
SCER considers that it is important that the NER are appropriately responsive to
sustained changes in demand to ensure that they are delivering the long term interests of
consumers, as set out in the National Electricity Objective. Consequently, SCER will
monitor the effectiveness of the Rules, as recently amended, to ensure that capital
expenditure is appropriately responsive to changes in demand.
3
4