New rules mitigate power prices
The Australian Energy Regulator’s draft decision on SA Power Networks (SAPN) pricing may herald a period of relatively stable electricity charges, giving businesses a more predictable platform for growth.
In the first determination of SAPN’s network charges using new national guidelines, the regulator estimated prices for small businesses in South Australia should drop by 9.8 per cent (or $381) in 2015-16, decline by a further 2.4 per cent in the following financial year and then remain virtually unchanged for the rest of the decade.
It was a result consistent with determinations for power transmission networks in NSW, the ACT and Queensland announced on the same day by the Australian Energy Regulator (AER).
The new pricing regime for transmission networks – which can constitute up to 50 per cent of overall power prices – is the culmination of reforms put in place over the past four years by successive governments in Canberra.
The Federal Minister for Industry and Science, Ian Macfarlane, said the AER’s decisions showed reforms undertaken by the COAG Energy Council were working.
“Under arrangements established by the COAG Energy Council, chaired by the Commonwealth, there are new rules for the Australian Energy Regulator so it has the power to ensure that network businesses are only charging customers for necessary and efficient costs,” Macfarlane said.
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“The reforms have strengthened the AER’s ability to question network businesses’ proposals, including the introduction of expenditure benchmarking and setting a reasonable rate of return on investment,” he said.
The AER challenged a number of SAPN’s claims and would only allow the network to recoup $3.21 billion in revenues from customers over the next five years, 32 per cent less than the company had requested.
One of the big ticket items in that equation was SAPN’s claim for operating costs – like labour and maintenance costs – of $1.52 billion. The AER rejected this figure and has only agreed to allow $1.23 billion in operating costs to be recouped.
The regulator maintained that it was not satisfied that the level of operating expenditure reflected the costs that a prudent operator with efficient costs and a realistic expectation of demand and cost inputs would need to deliver the distribution services.
Similarly, the AER rejected SANP’s claims for capital expenditure of $2.4 billion over five years, instead agreeing only to $1.68 billion. Again, the AER said SAPN had not demonstrated a case for the higher amount.
In an aspect of the determination welcomed by Business SA, the AER rejected additional expenditure claims by SAPN relating to environmental and bushfire expenditures.
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The AER said: “In respect of SA Power Networks’ proposed bushfire risk mitigation programs, it did not demonstrate that its proposals comply with its current or expected future safety obligations related to bushfire risk”.
“Nor did SA Power Networks demonstrate its proposed level of investment is prudent and efficient. SA Power Networks’ proposed road safety capital investment programs also were not justified by evidence that these are consistent with its obligations under the National Electricity Rules (NER).”
Business SA chief executive Nigel McBride said “our recent survey of member businesses found 87 per cent want reduced electricity prices as their highest priority over increased spending on measures to improve reliability, customer service, bushfire mitigation and road safety”.
Other elements of the AER’s decision included setting a rate of return (SAPN’s cost of capital) of 5.45 per cent in 2015-16, rejecting SAPN’s submission for 7.62 per cent.
The AER said the investment environment had improved since its previous decision and “this improvement translates to lower financing costs necessary to attract efficient investment”.
The AER reduced SAPN’s depreciation allowance by 43 per cent, to $402 million, the impact of which would be that the company “will recover its investment from customers more gradually”.
Interested parties have until 3 July 2015 to respond to the AER’s draft SAPN determination.
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