Australian Energy Markets Commission releases its proposed rule for transmission pricing

By Hilary Hurrell and Paul O'Donnell.

Key Points:
The proposed rule is less prescribed that the current rules regulating this area. Transmission network service providers and the Australian Energy Regulator are given greater discretion in the implementation of the principles contained in the proposed rule.

In accordance with its obligations under the National Electricity Law the Australian Energy Markets Commission ("AEMC") has undertaken a review of the revenue and pricing rules to apply in respect of electricity transmission network services from 1 January 2007. Given what it considered to be the complexity of the task, the AEMC conducted its review in two parts - namely:

• a review of the regulation of transmission revenues; and
• a review of the regulation of transmission prices.

The AEMC issued its Draft Determination and its second Draft Rule in respect of transmission revenues in July 2006, but is in the earlier stages of its review of the regulation of transmission pricing. As part of this review the AEMC released the Proposed National Electricity Amendment (Pricing of Prescribed Transmission) Services Rule 2006 on 24 August 2006. At the same time the AEMC released a Rule Proposal Report setting out its reasons behind the Proposed Rule.

The Proposed Rule only deals with the regulation of transmission pricing for "Prescribed Transmission Services" (the Draft Transmission Revenues Rule deals with the principles and processes for the pricing of "Negotiated Transmission Services"). Given the connection between transmission revenues and transmission pricing, the AEMC has stated that in preparing the Proposed Rule it has sought to design an overall effective regulatory framework covering both transmission revenue and transmission pricing. The AEMC has requested feedback on the consistency of the treatment of these two types of transmission services in the proposed rules.

In conducting its review of the regulation of transmission pricing, the AEMC focused on a number of factors including:

• the promotion of the National Electricity Market Objective of the provision of efficient, reliable and safe electricity services for the long term interests of consumers;
• the need for transparency in, and stability and predicability of, transmission network pricing; and
• the role that transmission networks play in the promotion of competition and efficient resource use in the wholesale and retail electricity markets.

Summary of the Proposed Rule and comparison with the current regime

The AEMC has stated that, while it considers that the substance of the existing rules regulating transmission pricing is appropriate, it considers that "the current Rules for transmission pricing incorporate an unnecessary level of detail regarding the implementation and administration of pricing methodologies". To this end, and consistent with the Draft Transmission Revenues Rule, the AEMC has determined that a "principles-based" approach to transmission pricing is more appropriate. As a consequence, the Proposed Rule is less prescribed than the current rules regulating transmission pricing, with only the "fundamental" principles and processes for the regulatory framework being set out in the Draft Rule itself and transmission network service providers ("TNSPs") and the Australian Energy Regulator ("AER") being given the discretion to develop processes for the implementation of those principles.

Key features of the Proposed Rule include:

• continuation of the "causer pays" principle - the Proposed Rule confirms the AEMC's view that the "causer pays" principle remains fundamental to transmission pricing and in particular for efficient economic decision making. As such, the AEMC has developed a concept of costs that are "directly attributable (on a causation basis)" to reflect this. The elements which have been codified in the Proposed Rule (the "Pricing Principles") largely reflect (albeit at a higher level) the current pricing rule (these principles are set out in clause 6A.24 of the Proposed Rule)
• development of pricing methodology guidelines - the AEMC has emphasised that it considers that a "principles-based" approach to transmission pricing should be supported by "clear procedural arrangements incorporating the assessment of pricing methodologies by the AER in accordance with principles in the Rules". To this end, the Proposed Rule provides for the making and amending of pricing methodology guidelines by the AER - such guidelines must, amongst other things, be consistent with the Pricing Principles contained in the Proposed Rule and must also be published by the AER. In addition, the Proposed Rule outlines what these guidelines may contain - such as the form of a proposed pricing methodology and that the AER may agree on limitations on the public disclosure of parts of a TNSP's pricing methodology without the consent of that TNSP;
• review by the AEMC of proposed pricing methodologies - the process for approval by the AER of a TNSP's proposed pricing methodology contained in the Proposed Rule emphasises the AEMC's focus on addressing the need for transparency in TNSP pricing decisions. In contrast with the current regime, the Proposed Rule requires the AER to publish a TNSP's proposed pricing methodology, and to take into consideration any comments received, from interested parties in respect of that pricing methodology. Interested parties are also given the opportunity to comment on the AER's draft decision in respect of a TNSP's pricing methodology.
• "prudent discount regime" - the AEMC has determined that the current prudent discount regime provided for in the Rules continues to be appropriate. However it has stated that to heighten the transparency of such arrangements the AER's current guidelines in respect of this discount regime should become part of the Rules. In addition, in contrast with the current regime, the Proposed Rule permits TNSPs to apply to the AER for "upfront approval" to recover the discounted amount from other customers and sets out the process to be followed by the AER in determining whether to give such approval.
• embedded generation - under the Proposed Rule, embedded generators will continue to receive TUoS rebates. However, the AEMC has sought feedback on whether the ability of embedded generators to receive such rebates should be conditional (primarily depending on the size of the embedded generator).
• inter-regional TUoS arrangements - the AEMC sought feedback from industry participants on whether changes should be made to the current treatment of inter-regional TUoS transfers. The AEMC has stated that most of the submissions received favoured minimal (or no) changes to these arrangements. Nevertheless, the AEMC has requested further feedback on this issue.

Timeline

The AEMC has formulated the following timeline for its review of transmission pricing:

• 25 September 2006 - submissions on the Rule Proposal closed;
• October/November 2006 - a Draft Pricing Rules is expected to be released by the AEMC;
• December 2006 - submissions on the Draft Pricing Rules are due; and
• By 1 January 2007 - release of final pricing rule.

For further information, please contact Paul O'Donnell.