18/09/2019 - 14:43

ERA claims $7.5bn savings

18/09/2019 - 14:43


Save articles for future reference.

Consumers have saved $7.5 billion through the Economic Regulation Authority’s tight leash on major utilities, according to chair Nicky Cusworth, but work is needed to make the state's rules regime more effective.

ERA claims $7.5bn savings
The ERA regulates businesses such as Western Power. Photo: Gabriel Oliveira

Consumers have saved $7.5 billion through the Economic Regulation Authority’s tight leash on major utilities, according to chair Nicky Cusworth, but work is needed to make the state’s rules regime more effective.

The $7.5 billion figure was the difference between what utilities had requested as allowances for costs and what the authority had approved over a 10-year period, Ms Cusworth said.

Speaking at the Energy in WA conference today, she said about $5.7 billion was saved on operating costs, with a further $2 billion through compressing capital expenditure.

The ERA affects electricity and gas prices through the application of formulas to a company’s capital base and approved spending, which provide an allowed revenue stream.

Access arrangements determine standardised prices for customers of monopoly assets, such as the electricity grid, rail networks or gas transmission pipelines.

This year, the ERA has been going through the process with gas distributor Atco Australia.

Atco planned to lift charges to pay for a capital investment in the network, with a final decision on the five-year arrangement expected by October.

In September 2018, the ERA ordered Western Power to cut operational spending by $744 million for the five years to 2022.

But Ms Cusworth said a lot of work could be done to make the system more effective.

With Western Power, the authority had created an arrangement where the company would carry more risk for inaccurate demand forecasts while allowing for a greater return if it provided services customers needed. 

The ERA was constrained it its ability to apply discretion, she said.

“Complexity, conservatism and conflict are built into the way the system is designed,” Ms Cusworth said.

“When we do access arrangements, we are relying on academic models, legal precedents, and a whole stack of ingrained knowledge within organisations, which is really hard to explain to the outside world.

“The financial incentives are asymmetrical.

“If we come up with a decision a regulated entity doesn’t like, it might cost them a few million (dollars) to challenge that ruling; but if they are successful they might get several hundred million dollars.”

Another potential problem was that decisions were made on a propose-and-respond model, with the ERA only able to approve or deny applications.

“It turns into something like a game of battleships … a very adversarial, a quite formal and quite rigid system,” Ms Cusworth said.

“That’s not necessarily a bad thing.”

She said the framework needed to become more effective at incorporating input from consumers, and to focus on outputs rather than inputs.

Ms Cusworth expected some of these challenges would be addressed by the state government’s Energy Transformation Taskforce, which will report on rule changes to energy markets by the end of the year.

Broader problems

Ms Cusworth toldtoday’s conference she believes people are losing trust in experts and regulators more generally, sometimes with good reason.

“We are seeing (that) not just in regulation, and not just in Australia, but as a phenomenon of politics and social change around the world,” she said.

“In Australia, not just in energy, that has been exacerbated by bad behaviour by regulators and regulated entities.”

An example was in the building industry, Ms Cusworth said, where a review said rules had to be changed to be understood by market participants and enforced properly by regulators.

“The Banking Royal Commission also uncovered many deficiencies in the way that the financial sector regulatory structure operated,” she said.

“That included perverse incentives where people were rewarded for poor behaviour.”

In addition, it was important to have the right culture in the industry, she said.


Subscription Options