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Electricity and gas price: disappointing

The Australian Energy Regulator (AER) has described last week’s Full Federal Court of Australia decision as disappointing for NSW and ACT electricity and gas customers.

The original AER determinations of the revenue that Ausgrid, Endeavour Energy, Essential Energy, ActewAGL and Jemena Gas Networks (NSW) could collect from customers to operate their networks were made in 2015 and have been the subject of appeal to the Australian Competition Tribunal and the Full Federal Court.

The Federal Court has upheld the AER’s appeal in relation to the Tribunal’s decision on the cost of corporate income tax but upheld the Australian Competition Tribunal’s findings in relation to the networks’ operating expenses and the cost of debt.

“While we welcome the Court’s decision regarding corporate income tax, this decision is disappointing for NSW and ACT electricity and gas customers overall. It may also have implications for customers in other states,” AER Chair Paula Conboy said.

“Our 2015 decisions set lower revenues than proposed by the network businesses in NSW and ACT, partly because we concluded that costs above efficient levels should be funded by the network owners, not customers,” Ms Conboy said.

The AER will carefully consider the judgement, next steps and any implications for these and other network revenue determinations.

Background

In April and June 2015 the AER determined the maximum revenues that the electricity and gas distribution networks in NSW and ACT could earn. These amounts are recovered from customers through network charges, which make up a portion of electricity and gas bills paid by customers.

The AER’s determinations for the 2014–19 period allowed less revenue than proposed by the network businesses. These lower revenues were driven by AER findings that the NSW and ACT electricity networks were not operating as efficiently as other comparable networks. The AER also determined a lower rate of return and corporate tax allowance, consistent with market trends.

The network businesses sought a limited merits review of the AER’s decisions in the Australian Competition Tribunal, seeking to recover greater revenue from customers. The process is ‘limited’ in that an applicant to the Australian Competition Tribunal must demonstrate an error of fact, incorrect exercise of discretion, or unreasonableness by the AER. These are referred to as the grounds of review. One of the grounds of review must be established before the Tribunal can vary the decision or order the AER to remake it.

In February 2016, the Tribunal found in favour of the AER in some matters and in favour of the businesses in other areas. The Tribunal directed the AER to remake its decisions in relation to the networks’ operating expenses, cost of corporate income tax and cost of debt.

The AER subsequently applied to the Federal Court for judicial review of the Tribunal’s decisions to set aside the network revenue determinations. The AER asked the Federal Court to consider whether the grounds of review were properly established by the network businesses and whether these were correctly applied by the Tribunal.

The COAG Energy Council has identified that the limited merits review regime is failing to meet its policy intent and is leading to higher prices for consumers, and is considering a range of reforms.

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