In late 2012, the Australian Energy Market Commission’s Power of Choice review recommended substantial reforms to the National Energy Market (NEM) at both state and federal levels. These reforms aim to support the electricity market in meeting consumer needs over the next 15-20 years and provide consumers with a greater variety of options regarding their electricity use. Following extensive industry consultation and the consideration of various rule change requests from the COAG Energy Council and IPART, the draft rule determination for distribution network pricing agreements has been released.

Enabling consumer choice

The Power of Choice report includes a variety of recommendations by the AEMC, intended to provide more opportunities for electricity consumers to make informed choices about their electricity use based on the benefits provided by end use services.

These include measures to reform distribution network pricing principles to improve consumer understanding of cost reflective network tariffs, and enabling flexible pricing options to provide greater reward for those who change their consumption patterns.

Rule change requests

After the Power of Choice report was released, IPART and the Council of Australian Governments’ (COAG) Standing Council on Energy and Resources (SCER) submitted a number of rule change requests related to distribution network pricing arrangements.

Under current price structures, all consumers pay the same network prices based on fixed charges and the volume of electricity consumed, regardless of how or when they are using power. Network prices are responsible for about 50 per cent of the electricity prices paid by residential consumers on average across Australia, and a key driver of these costs is peak demand.

SCER proposed that network pricing principles be adjusted to encourage distribution network prices to be set on a more cost reflective basis, to provide more efficient pricing signals to consumers.

Other objectives of the rule change requests received from IPART or SCER included:

Greater certainty for retailers and consumers on how and when distribution network businesses will change their network prices over time;

More opportunity for those affected by distribution network prices to be consulted on the development of those prices; and

Changes to the timing of annual network price setting.

The AEMC has now finished considering the requests and addressed them in the new draft rule.

The draft rule

In the draft determination, the AEMC has set a new pricing objective for distribution businesses so that prices can more accurately reflect the costs of providing network services to each consumer.

In order to achieve the objective distribution businesses must comply with four new pricing principles:

Each network tariff must be based on the long run marginal cost of providing the service. If consumers choose to take actions that will reduce future network costs, such as by reducing their energy usage during peak demand, then they will be rewarded with lower prices. Network businesses will have flexibility about how they measure long run marginal cost.

The revenue to be recovered from each network tariff must recover the network business’s total efficient costs of providing services in a way that minimises distortions to price signals that encourage efficient use of the network by consumers.

Tariffs are to be developed in line with a new consumer impact principle that requires the impact of annual changes in network prices to be minimised and prices to be easily understood. Consumers are more likely to be able to respond to the price signals that network prices are designed to send if they can relate their usage decisions to network price structures and sudden price changes are avoided. Network businesses can gradually phase-in new prices over several years if necessary to minimise the impacts of price changes on consumers.

Network tariffs must comply with any jurisdictional pricing obligations imposed by state or territory governments. But if network businesses need to depart from the above principles to meet jurisdictional pricing obligations, they must do so transparently and only to the minimum extent necessary.

Obligations for distribution businesses

The draft rule contains a new process and new timeframes for setting network prices. Distribution businesses will be required to:

Develop a tariff structure statement for approval by the AER as part of their five-year regulatory reset process.

Key matters including price structures will be approved as part of this process, subject to a limited ability to make amendments during the regulatory period with AER approval.

Price levels will continue to be approved annually, but a pricing schedule will give consumers and retailers more information about indicative price levels for the regulatory period.

Demonstrate to the AER how they have consulted with consumers and retailers in developing their price structures.

Notify consumers and retailers of final network prices at least six weeks before they commence, allowing them to better prepare for price changes.

Where to now?

AEMC Chairman John Pierce says the organisation is “focused on establishing the right regulatory regime for the future so everyone can make clearly informed decisions about their energy use as new technologies emerge”.

The AEMC’s final rule determination will be published in November 2014 after the consideration of further stakeholder submissions and discussion via a public forum.

The AEMC is currently assessing a series of other Power of Choice rule changes related to a number of areas including customer access to information about their energy consumption; expanding competition in metering and related services; the availability of better demand side participation information; and reform of the demand management embedded generation incentive scheme.

Further updates about the program and the final rule will be covered in future issues of Utility. The rule change schedule can be found on the Power of Choice website: www.aemc.gov.au/Major-Pages/Power-of-choice