What will customers be willing to pay under the new electricity network regulatory arrangements?

From his role as Manager, Economic Regulation at South East Water when independent economic regulation of the Victorian water industry commenced, to his role as Principal Economist at SP AusNet when it was preparing its 2011 Electricity Distribution Pricing Submission and his nearly 10 years’ of consulting experience, Rohan has observed the creation and evolution of various different regulatory arrangements.

The differences between the regulatory arrangements that have up until recently applied to electricity network businesses and water businesses were stark: at one end were the regulatory arrangements that applied to electricity network businesses operating in the National Electricity Market (NEM), which were underpinned by a very detailed set of Rules and which up until recently, provided electricity network businesses with the right to apply for Limited Merits Review (LMR) of the decisions made by the Australian Energy Regulator (AER). Prior to the removal of LMR, businesses tended to adopt a more adversarial approach to their engagements with the AER (and vice versa), whilst also (quite reasonably) using the submission process to establish potential grounds for appeal.

At the other end of the spectrum, the regulatory arrangements that have operated in the water industry (particularly in Victoria and NSW) have historically been less legalistic, more customer-centric, with businesses adopting a much less adversarial approach to their engagement with their economic regulator. This customer-centric approach has been further enhanced in Victoria, where a new regulatory model called ‘PREMO’ (Performance, Risk, Engagement, Management and Outcomes) is now being applied to the water industry. The customer-centric PREMO approach seeks to, amongst other things, incentivise water businesses (via the potential to earn higher equity returns) to align their proposed outcomes with those of their customers and community.

The removal of the right to apply for LMR of most of the decisions of the AER, combined with greater resourcing of customer representative bodies, means that the regulatory arrangements faced by electricity network businesses are more aligned with the “old” water industry model – one where customer engagement was an important (but not absolutely central) part of the regulatory submission process. It will be interesting to see whether this regulatory model leads to results that are genuinely more aligned with the long-term interests of consumers, a key determinant of which will be whether the engagement undertaken by the businesses supports the provision of robust empirical evidence – not just qualitative evidence – as to their customers’ willingness to pay for changes in existing levels of service. In the absence of this, it will be interesting to see if other stakeholders or regulators fill the void, for example, ESCOSA is undertaking a detailed willingness to pay study (on which Oakley Greenwood is advising) to inform the reliability levels that will be included in the SA Electricity Distribution Code (which in turn will underpin SA Power Network’s regulatory submission).

Whilst the initial results of the PREMO framework indicate that the majority of water businesses (including Yarra Valley Water, who Oakley Greenwood advised throughout its PREMO submission process) have proposed price reductions in their price submissions, which on face value might be considered to be in the long-term interests of consumers, the interesting part will be the extent to which these price reductions actually result in true efficiency improvements (e.g., cost reductions, increased levels of service), or whether businesses outturn results are more indicative of the model promoting wealth transfers from government-owned water businesses to their customers (whether this is due to the water business achieving lower than efficient returns for their government shareholder, or because the water business is taking on more risk despite this not representing the most efficient allocation of that risk). Only time will tell.

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