Statement of Intent 2016–17

ISBN: 978 1 922145 86 4

© Commonwealth of Australia 2016

This work is copyright. In addition to any use permitted under the Copyright Act 1968, all material contained within this work is provided under a Creative Commons Attributions 3.0 Australia licence, with the exception of:

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Photography: Allison Crowe

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Reference: 59325-D16/70203

ACCC 06/16_1104

Australian Energy Regulator

The AER regulates energy markets and networks under national legislation and rules. Our independent Board has three members, who are statutory appointments.

We regulate energy markets and networks in eastern and southern Australia, as well as networks in the Northern Territory. Our functions are expected to widen in 2016–17 to cover energy networks in Western Australia.

The AER:

  • sets the amount of revenue a network business can recover from customers for using energy networks (the electricity poles and wires and gas pipelines that transport energy)
  • monitors wholesale electricity and gas markets to ensure energy businesses comply with the legislation and rules, and takes enforcement action where necessary
  • regulates retail energy markets in Queensland, New South Wales, South Australia, Tasmania (electricity only) and the ACT
  • operates the Energy Made Easy website, which provides a retail price comparator and other information for energy consumers
  • publishes information on energy markets, including the annual State of the energy market report.

We support the COAG Energy Council, with briefings on energy market activity and by providing advice on energy market issues as they arise. We also work with other energy market bodies, including the Australian Energy Market Commission (AEMC), Australian Energy Market Operator (AEMO) and Energy Consumers Australia (ECA), on policy matters, rule change processes and market issues. Additionally, we assist the Australian Competition and Consumer Commission (ACCC) with energy-related issues arising under the Competition and Consumer Act 2010, including consumer protection, mergers and authorisations.

Chair’s introduction

I am pleased to introduce the Australian Energy Regulator’s Statement of intent for 2016–17, setting out how we propose to meet the COAG Energy Council’s expectations of us. We report here on our proposed work program, including performance indicators, our relationship with government, and issues of transparency and accountability. The statement also responds to the Australian Government’s Regulator performance framework on undertaking regulatory functions with the minimum impact necessary.

We work in a challenging market environment. A central priority for the Energy Council is to modernise regulatory frameworks to meet the needs of increasingly dynamic and decentralised energy markets. In 2016–17, the AER will participate in a Standing Committee of Officials working group aiming to ensure regulatory frameworks are designed so consumers can benefit from new energy technologies and selling models, while maintaining appropriate protections. The group seeks to identify services that should be opened to competition, determine whether existing frameworks will drive efficient investment and operational decisions (including demand side response), and assess impacts on power system security. In the wholesale space, we will participate in a project on how best to integrate evolving technologies in the market. A particular focus will be on South Australia, which has the highest penetration of wind and solar photovoltaic generation in the National Electricity Market.

The AER will also support the Energy Council’s wider Power of Choice initiatives in 2016–17. Our work in this space will include finalising assessments of new tariff structures for distribution networks so that prices better reflect the costs of supplying electricity to consumers. We are also developing new ring fencing guidelines for electricity network businesses, that support the development of competitive markets and innovative technologies and services.

The Energy Council has also flagged priorities in upstream gas markets. In 2016–17 we will engage in processes that may arise out of recommendations in the AEMC’s East coast gas review and ACCC’s inquiry into eastern and southern Australian wholesale gas prices, some of which may result in refinements to market design.

In these and other areas, we will work closely with the Energy Council and all stakeholders to help ensure Australia’s energy markets and regulatory arrangements remain sufficiently responsive and flexible to the needs of consumers and industry, while still offering stability and predictability for investors.

Paula Conboy

Chair
Australian Energy Regulator

Response to the COAG Energy Council’s Statement of Expectations

To strengthen accountability and performance frameworks, the COAG Energy Council in 2014 developed a Statement of expectations for the AER. In the statement (appendix 1), the Council outlines its expectations that the AER will:

  • perform its legislative functions and implement a work program that supports the objectives set out in the national energy legislation
  • adopt accountable and transparent processes, including by:

– publishing a Statement of intent for each financial year, outlining how we will meet the Statement of expectations

– publishing performance indicators in the Statement of intent

– reporting against our performance in the AER’s Annual report

– providing clear guidance on how the AER’s funds have been spent

  • effectively engage with market participants, consumers and government
  • work productively with other market institutions in accordance with legislation and memoranda of understanding
  • support the COAG Energy Council by providing it with advice on energy issues, reporting on the AER’s priorities and work program and through clear communication on other matters as required.

Our core role

Our core role is to undertake functions set out in the national energy legislation. Our decision making is guided by the national energy objectives: to promote efficient investment in, and efficient operation and use of, energy services for the long term interests of energy consumers with respect to price, quality, safety, reliability and security of supply. These objectives are reflected in our approach to energy network regulation (work program area 1), retail market regulation (area 2), wholesale market monitoring (area 3) and compliance and enforcement (area 4), and are mirrored in performance indicators for those program areas (pages 16–18).

Accountability and transparency

We adopt accountable and transparent processes across our work program, including by:

  • publishing a Statement of intent for the coming year that sets out our objectives, supported by details on our work program and specific areas of focus
  • developing and publishing performance indicators and deliverables (set out in this statement)
  • reporting against our performance (including performance indicators and deliverables) in our Annual report
  • reporting on how funds have been spent in our Annual report and the joint ACCC–AER Annual report
  • developing a framework and approach and draft decision for regulatory reviews, and guidelines on our approach to regulatory functions, in consultation with stakeholders
  • publishing a Statement of approach to compliance and enforcement, and reporting on outcomes of our enforcement activity.

Stakeholder engagement

We engage with consumers and market participants through a variety of forums, including through:

  • periodic stakeholder surveys to identify areas where we can improve our performance and capabilities (a survey was conducted in April 2016, with outcomes to be published in our 2016 Annual report)
  • meeting three times a year with our Customer Consultative Group, consisting of residential and small business energy customer intermediaries, including those representing disadvantaged and vulnerable customers
  • our Energy Made Easy website, which provides information on the energy market, consumer protections and available energy offers
  • a Consumer Challenge Panel that advises the AER whether network regulatory proposals are in the long term interests of consumers and whether network businesses engage effectively with their customers
  • jurisdictional groups of stakeholders covering business and residential consumers, convened for regulatory reviews of network proposals
  • consulting with energy businesses during regulatory review processes, guideline development, business forums and through informal engagement.

Working productively with other institutions

We work productively at Board and staff level with other energy market bodies—the AEMC, AEMO and the ECA. We engage with these bodies, including through consultation on policy matters, rule change processes and administrative schemes.

Memoranda of understanding between the AER and other energy agencies set out expectations for information sharing, consultation and other communication, and coordination of activities. We have memoranda of understanding with the AEMC, AEMO, the Clean Energy Regulator, Energy Safe Victoria, the Commonwealth Department of Human Services, jurisdictional regulators and ombudsmen.

We also engage with other agencies such as the Australian Securities and Investments Commission on energy market issues, participate in working groups and facilitate staff secondments as opportunities arise.

More generally, we make submissions on and help with energy policy matters relating to our functions, particularly where we have specialist expertise and knowledge. In 2016–17 we will engage with the AEMC on various energy policy reviews and rule change processes.

Supporting the COAG Energy Council

We support the COAG Energy Council and the Council’s Standing Committee of Officials (SCO) by providing clear advice on energy issues as required. In particular, we brief Council meetings on key issues, and draw on our expertise to engage in rule change processes and policy reviews initiated or approved by the Council.

Key matters for 2016–17 will include:

  • contributing to a SCO working group aiming to ensure energy regulatory frameworks can integrate emerging technologies and business models
  • consulting with the COAG Energy Council on implementation of a new role flagged for the AER on monitoring the performance of wholesale electricity markets
  • supporting the COAG Energy Council in any review of limited merits review arrangements in the national energy laws
  • engaging in processes that may arise out of recommendations made in the AEMC’s East coast gas review and ACCC’s inquiry into eastern and southern Australian wholesale gas prices
  • supporting the COAG Energy Council in implementing its response to the AEMC’s financial resilience review.

More generally, our State of the energy market publication provides high level and accessible information to the COAG Energy Council on market activity and dynamics.

Our work program for 2016–17

The AER has a diverse work program informed by the requirements of the energy market laws and rules. Our work program comprises ongoing functions set out in the legislation, as well as roles in energy policy and market development.

We have four ongoing work program areas in 2016–17:

  • energy networks
  • retail energy markets
  • wholesale energy markets
  • compliance and enforcement.

Within each program, our areas of focus over the next 12 months reflect challenges posed by our operating environment and projected market conditions. Significant issues in 2016–17 are likely to include:

  • ongoing appeals processes relating to our network revenue decisions for the NSW and ACT electricity distribution businesses, and NSW gas business. The appeals will be heard by the Full Federal Court during the year
  • preparation for Western Australia’s expected application of the national energy laws to network businesses in that state. The AER will receive revenue proposals for Western Australia’s electricity transmission and distribution businesses in April 2017, subject to the passage of enabling legislation
  • the emergence of new energy technologies and selling models. We will contribute to a SCO working group aiming to ensure the regulatory framework allows consumers to benefit from innovative services, while maintaining appropriate protections. The group seeks to identify services that should be opened to competition, determine whether the existing framework will drive efficient investment and operational decisions (including demand side response), and assess impacts on power system security.

Program area 1: Energy networks

We undertake network regulation that promotes efficient investment in energy network services that customers value. In particular, we aim to ensure that consumers pay no more than necessary for the safe and reliable delivery of energy services.

Our central role in the networks space is to set the revenue that can be recovered from customers’ use of regulated energy networks (electricity poles and wires, and gas pipelines). We typically undertake a full regulatory review of each network once every five years.

The AER’s network determination workload will ramp up significantly in the latter half of 2016–17. Overall during the year, we will finalise reviews of four network businesses, receive nine regulatory proposals and commence framework and approach processes for a further seven networks. Included in this work will be our first reviews of the Northern Territory and Western Australian electricity networks under the national framework.

Additionally, we will participate in ongoing appeals processes relating to earlier decisions, including on the NSW and ACT electricity distribution networks, and NSW gas distribution network, that were remitted to us by the Australian Competition Tribunal in February 2016. The AER appealed those Tribunal decisions to the Full Federal Court, which will hear the appeals in 2016–17.

Another key focus will be our work to help implement the Power of Choice reforms. We will finalise our assessments of new tariff structures for distribution networks and develop new ring fencing guidelines that separate the competitive and regulated parts of network businesses to support the development of competitive markets for energy services.

We are committed to meaningful engagement with all stakeholders in our review processes, including industry, consumers and government. Jurisdictional groups of consumer representatives for each regulatory review provide coordinated and informed views from a cross-section of consumer groups. The Consumer Challenge Panel advises on issues of importance to consumers and helps ensure consumer perspectives are properly considered throughout technical and complex regulatory processes.

We recognise the value in ongoing refinement of our systems and processes. In 2016–17, we will refine our benchmarking tools, including our networks database, for assessing the comparative efficiency of network businesses. We will also update our Expenditure assessment guideline and associated information instruments in light of our recent experience in applying the current approach. One focus will be to extend incentive scheme arrangements to gas networks.

Network revenue decisions

We regulate the costs of electricity network services, and access prices for covered gas pipeline services, in Queensland, NSW, Victoria, South Australia, Tasmania, the ACT and the Northern Territory. Currently we regulate 32 energy networks, comprising:

  • 21 electricity networks (seven transmission and 14 distribution)
  • 11 gas pipelines and networks (four transmission and seven distribution).

Our functions are expected to widen in 2016–17 to include energy networks in Western Australia.

The regulatory process for electricity networks begins with the development of a framework and approach, following which the network business submits a regulatory proposal. We have 15 months to review a proposal and release a final decision. In the process for gas pipelines and networks, we have six months (plus stop-the-clock time at certain stages of the process) to decide whether to approve an access arrangement proposal. The time can be extended by two months, with a maximum of 13 months to render a decision.

In summary, our work in this area during 2016–17 will entail:

  • completing reviews of the Queensland and Victorian electricity transmission networks, and the Tasmanian electricity distribution network
  • completing an access arrangement review for the Roma to Brisbane Pipeline (Queensland)
  • commencing a review of regulatory proposals for the NSW, South Australian and Western Australian electricity transmission networks, the Murraylink transmission interconnector and the Western Australian electricity distribution network
  • commencing access arrangement reviews for the Victorian gas transmission system and distribution networks
  • developing frameworks and approaches for the NSW, ACT, Tasmanian and Northern Territory electricity distribution networks and the Tasmanian electricity transmission network.

Figure 1: Timelines for AER determinations on regulatory proposals for electricity networks

Figure 2: Timelines for AER determinations on access arrangement proposals for gas pipelines and networks

Merits review of regulatory decisions

Our regulatory determinations on energy networks are subject to limited merits review by the Australian Competition Tribunal. A successful review must demonstrate that addressing the grounds of appeal would lead to a ‘materially preferable outcome in the long term interests of consumers’. If the Tribunal finds the AER erred, it can substitute its own decision or remit the matter back to the AER to remake the decision.