Economic surplus

Economic surplus

Our electricity network regulation is in trouble

Want to check if Australia’s utility regulation is working? To highlight the problems, you need look no further than the recent decisions by the Australian Competition Tribunal on four electricity network businesses.

Don’t get me wrong. These are fine legal decisions. But they also highlight the underlying failure of Australia’s utility regulation.

The decisions relate to earlier work by the Australian Energy Regulator (AER), covering three NSW state-government-owned companies, Ausgrid, Endeavour Energy and Essential Energy, as well as ActewAGL, a joint venture between private and ACT government-owned companies. The AER decisions were meant to set prices for the 2014-19 period. However, the Tribunal has decided to “set aside the AER’s decisions and have the AER make them again.”

So even if the AER rattles through a new set of decisions, the 2014-19 prices will not be implemented until at least the middle of 2016, two-years late.

This delay is not the fault of the Tribunal, the AER or even the companies. It is symptomatic of a dysfunctional regulatory system that is desperately in need of major reform.

The evidence?

Well let’s start with this quote from the Tribunal’s summary document:

The hearing of oral submissions by those opposing the AER’s decisions and from the AER occupied three weeks. The review-related material which the parties drew on in making their submissions was said to extend to more than one million pages. Lengthy written submissions were presented to the Tribunal – on but one issue (the AER’s opex allowances) the parties’ written submissions were over 460 pages and their oral submissions occupied three and a half days filling over 250 pages of transcript.

The Tribunal is not alone in facing a mountain of lawyer and consultant generated information. The AER faced the same problem in reaching its initial decisions. And, as a result, the AER’s original decisions were equally lengthy. As the Tribunal notes the AER’s original Ausgrid decision “comprised an overview of 66 pages and 20 attachments totalling 1,470 pages”. The other AER decisions were of “similar size”.

This explosion in the size of regulatory decisions is not new. As recent research by Joe Dimasi and Peter Lambert of the Monash Business Policy Forum makes clear, the Tribunal is simply continuing a twenty-year trend.

Index of length of regulatory decisions for electricity distribution and transmission. Monash Business Policy Forum

This graph, from the Research, shows the increase in the size of regulatory decisions in electricity since 1998. The graph is based on data from the AER’s website. ‘t’ refers to a transmission company while ‘d’ refers to a distribution company. In simple terms, some recent regulatory decisions are roughly twenty-to-thirty times longer than twenty years ago.

This problem is well known in regulation. Initially, a regulatory scheme is apparently simple and clear. But there are always loopholes and differences of opinion. These get debated and exploited. The rules are expanded to fix up the flaws. But this simply creates more debate and potentially new loopholes. These are exploited, and so on.

The increasing complexity means that it takes longer and longer to make a decision. As the Research notes:

Queensland’s distribution sector has seen a 6.5 fold increase in time taken to arrive at a final decision. Victoria’s distribution sector saw the time taken roughly double after each five year regulatory period from 2000 to 2010. The most recent NSW/ACT decisions governing a five-year period took three years four months to complete. Appeals extend these timelines further.

The increased complexity not only means more time and resources are wasted. It also means that decisions are likely to be worse. Current regulatory decisions are all but unintelligible to anyone outside a small group of specialists. And as the Research notes, the size of the regulated networks (called the regulatory asset base) has been allowed to grow exactly at the same time as the demand for electricity transmission has been falling.

So how do we get out of this problem?

One alternative approach is based on negotiated settlements rather than judgements by all-powerful regulators and tribunals. Often regulation covers large businesses selling to other large businesses. In such situations, a better regulatory solution may involve ‘mediated bargaining’. The businesses negotiate to try and reach a solution. If they fail, then the regulator is called in. But if the business supplier and business customer agree on a deal, then it stands.

This ‘negotiate/arbitrate’ model is low cost and has been successfully used in Australia and overseas. But it is not generally used in our energy sector. The recent Tribunal decisions show that it should be.