Economic regulation

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 Economics has been a long-time advisor to parties on all sides of electricity regulation debates and processes. We have:

  • advised the Australian Energy Regulator on how to apply regulatory provisions to novel and difficult situations
  • worked with many jurisdictional regulators to regulate retail prices for gas and electricity and solar feed-in tariffs
  • advised network businesses on many aspects of their regulatory proposals, including cost of capital, benchmarking costs and demand forecasting.

A key part of energy regulation practice is tariff design and structure. Policy-makers frequently look to tariffs to send efficient signals to generators, consumers and prosumers regarding where they should locate and when they should consume or produce power. We turn economic regulations into tariffs. We can work with your modellers (or we can do the lot) including building models that we train clients how to use and modify. Our expertise includes financial modelling of the impacts and building models that link into broader financial models.

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.

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