Electricity networks exhibit many of the hallmark characteristics of ‘natural monopoly’ activities. With very large fixed costs, substantial economies of scale and profound coordination difficulties in decentralised planning, electricity networks cannot be entirely opened up to competitive provision. This has led most reforming policy-makers to separate electricity networks from generation and retailing activities and to subject networks to regulation by independent economic regulators.
Frontier has been a long-time advisor to parties on all sides of electricity network regulation debates and processes. In Australia, we have:
- assisted the Australian Energy Market Commission in drafting the Rules setting out the form and manner of regulation
- advised the Australian Energy Regulator on how to apply regulatory provisions to novel and difficult situations
- advised network businesses on meeting their regulatory obligations and putting forward the best possible cases for changes to the Rules where appropriate.
A key part of Frontier’s network regulation practice is network tariff design and structure. Policy-makers frequently look to network tariffs to send efficient signals to current and prospective network users (eg generators and consumers) regarding where they should locate and when they should consume or produce power. We have advised both the AEMC on the drafting of network pricing Rules as well as numerous network businesses on how they should seek to reform their tariff structures to meet policy-makers’ objectives. We have also advised generators in Australia and New Zealand on the economic robustness of proposed changes to network access and pricing provisions.
Network Investment criteria
For over a decade, Frontier has been the key external advisor to the AEMC and the AER on the development and refinement of cost-benefit tests for electricity network investment. Applying as they do to entities regulated under building block approach, such tests provide an important constraint on transmission and distribution networks’ incentives to inefficiently over-build or ‘gold-plate’ their networks.
Since 2003, we’ve advised the ACCC and subsequently the AER on the original Regulatory Test, the Regulatory Investment Test for Transmission (RIT-T) and finally the Regulatory Investment Test for Distribution (RIT-D), plus the accompanying sets of Application Guidelines.