Better Regulation
Final decision
Regulatory investment test for distribution and application guidelines
23 August 2013
© Commonwealth of Australia 2013
This work is copyright. Apart from any use permitted by the Copyright Act 1968, no part may be reproduced without permission of the Australian Competition and Consumer Commission. Requests and inquiries concerning reproduction and rights should be addressed to the Director Publishing, Australian Competition and Consumer Commission, GPO Box 3131, Canberra ACT 2601.
Inquiries about this document should be addressed to:
Australian Energy Regulator
GPO Box 520
Melbourne Vic 3001
Tel: (03) 9290 1444
Fax: (03) 9290 1457
Email:
Shortened forms
Shortened term / Full titleAEMC / Australian Energy Market Commission
AEMO / Australian Energy Market Operator
AER / Australian Energy Regulator
capex / capital expenditure
DAPR / Distribution Annual Planning Report
DNSP / distribution network service provider
DSER / demand side engagement register
NEM / National Electricity Market
NER / National Electricity Rules
NSP / network service provider
RIT-T / regulatory investment test for transmission
RIT-D / regulatory investment test for distribution
STPIS / service target performance incentive scheme
TNSP / transmission network service provider
VCR / value of customer reliability
WACC / weighted average cost of capital
Contents
Shortened forms 3
Contents 4
Executive Summary 5
Final decision 6
1 Introduction 7
1.1 Requirements of the National Electricity Rules 7
1.2 The RIT-D 7
1.3 Consultation 8
1.4 Structure of the final decision 8
2 RIT-D and application guidelines 9
2.1 Market benefit classes 9
2.2 Customer initiated projects 10
2.3 Removal of the base case 10
2.4 Additional distribution level market benefits 11
2.5 STPIS 14
2.6 Interested parties 14
2.7 Discount rates 15
2.8 Deemed Values 16
2.9 Guidance on stakeholder consultation 16
2.10 Clause 5.17.4(d) notices and screening for non-network options 17
2.11 Guidance on the lead party in joint planning 18
2.12 Reapplication of the RIT-D 18
2.13 Transition from Regulatory Test 19
2.14 Estimating option value 20
2.15 Reasonable scenarios and sensitivities 21
2.16 Estimating costs generally 22
2.17 Dispute Resolution 25
Executive Summary
The final decision accompanies the Australian Energy Regulator's (AER) final regulatory investment test for distribution (RIT-D) and accompanying RIT-D application guidelines (the application guidelines).
The AER is Australia’s independent national energy market regulator. Our role is to promote the national electricity and gas objectives. Enshrined in the National Electricity Rules (NER) and National Gas Rules, these objectives focus us on promoting the long term interests of consumers.
A major part of our work is regulating the energy networks that transport energy to consumers (electricity poles and wires, and gas pipelines). In 2012, the Australian Energy Market Commission (AEMC) announced important changes to the electricity and gas rules, affecting our role in regulation. The RIT-D is part of the AEMC’s Network Planning and Expansion Framework (the Framework). The Framework is applicable to distribution businesses in each national electricity market jurisdiction and aims to establish:[1]
a clearly defined and efficient planning process for distribution network investment. This will support the efficient development of distribution networks. It will also provide transparency to, and information on, distribution business planning activities and decision making processes. This will assist market participants in making efficient investment decisions and enable non-network providers to put forward non-network options as credible alternatives to network investment.[2]
The RIT-D establishes the processes and criteria for distribution network service providers (DNSPs) to apply before investment decisions are made. The purpose of the RIT-D is to ensure DNSPs consider all credible options (which may include both network and non-network options) when choosing how to address identified network needs.[3] The preferred option is that option which maximises the economic benefit to all those who produce, consume and transport electricity in the national electricity market (NEM).[4]
The application guidelines are designed to provide guidance to businesses applying the RIT-D and enhance transparency and consistency in investment decision making.[5] The application guidelines set out guidance on how to assess these options and the circumstances in which businesses are required to consider and quantify market benefits when undertaking a RIT-D. In developing the application guidelines we have ensured that the level of complexity required in the RIT-D process is commensurate with the value and impact of distribution projects.
Final decision
Our final decision largely maintains the proposed approaches set out in the draft RIT-D and draft application guidelines released on 5 June 2013.[6] Approaches to key issues that remain unchanged include:
§ interested parties
§ discount rates
§ deemed values
§ stakeholder consultation
§ lead parties in joint planning
§ option value.
We have provided further guidance on the treatment of costs associated with voluntary load curtailment. The application guidelines contain an additional example outlining the possible treatment of demand response payments.
There is also further clarity in undertaking the assessment of a cost-benefit analysis that includes an assessment of reasonable scenarios. This is in response to stakeholders noting that the current drafting of the draft application guidelines may imply that investment decision-making under conditions of uncertainty is a mechanistic exercise.
In response to feedback from stakeholders in the RIT-D workshops in May and June 2013 and submissions made to the AER on its draft RIT-D, we have included a discussion on the treatment of land in the application guidelines. The application guidelines note that a market value of land should be used in the assessment of costs incurred in constructing or providing a credible option.
1 Introduction
In conjunction with the regulatory investment test for distribution (RIT-D), we must develop and publish application guidelines for the operation and application of the RIT-D.[7] The application guidelines are designed to provide guidance to businesses applying the RIT-D and to enhance transparency and consistency in investment decision making.
The final decision on the RIT-D (final decision) sets out the provisions of the National Electricity Rules (NER) and the purposes of and reasons for which the RIT-D and application guidelines are developed.[8] The final decision should be read in conjunction with the RIT-D and application guidelines.
1.1 Requirements of the National Electricity Rules
The RIT-D arose out of the Australian Energy Market Commission (AEMC)'s national distribution planning arrangements review.[9] In October 2012, the AEMC implemented a new distribution network planning and expansion framework (the Framework). The Framework aims to provide transparency and information on distribution businesses planning activities and decision making processes.[10] The associated rule change came into effect on 1 January 2013.[11]
The RIT-D will replace the Regulatory Test for distribution investments (Regulatory Test).[12] Under cl. 5.17.2(d) of the NER, we are required to develop and publish the RIT-D and application guidelines by 31 August 2013. The RIT-D and application guidelines must be developed in accordance with the distribution consultation procedures.
The distribution consultation procedures require the AER to publish the proposed RIT-D and application guidelines with an explanatory statement and invite written submissions. Within 80 business days of publishing the proposed RIT-D and application guidelines, we must publish the final RIT-D and application guidelines. We may also publish any issues, consultation and discussion papers as we consider appropriate.[13]
1.2 The RIT-D
Clause5.17 of the NER requires a RIT-D proponent to conduct a RIT-D before it makes an investment decision to address an identified network need. Under cl.5.17.3(a) of the NER, a RIT-D should be applied to all distribution investments, unless the investment falls under specified exceptions.
The purpose of the RIT-D is to ensure that RIT-D proponents use appropriate measures to assess all credible options before they choose the best option available to meet their network's augmentation needs (the preferred option). The preferred option is that which maximises the present value of the net economic benefit to all those who produce, consume and transport electricity in the National Electricity Market (NEM).[14] For the avoidance of doubt, a preferred option may have a net economic cost where the identified need is for reliability corrective action. Based on the use of the Regulatory Test and the nature of distribution investments more generally, the majority of RIT-D projects are likely to be where the identified need is for reliability corrective action.
1.3 Consultation
We commenced the RIT-D development process with the release of a RIT-D Issues paper (Issues paper) on 21 January 2013. The Issues paper provided a brief overview of the Regulatory Test and requirements for a RIT-D. Submissions on the Issues paper closed on 25 February 2013.[15]
Prior to release of the draft application guidelines, we held workshops on a pre-draft RIT-D application guidelines. These workshops were held in Sydney and Melbourne on 15 and 16 May 2013. Stakeholders who attended the workshops were invited to submit comments.
The draft RIT-D and application guidelines were released on 5 June 2013. Further workshops were held in Melbourne and Sydney on 26 and 27 June 2013. Submissions were due by 18 July 2013 and can be viewed on the AER’s website.
The final decision accompanies the RIT-D and application guidelines published on 23 August 2013.
1.4 Structure of the final decision
The final decision discusses the issues that were raised in submissions to the draft RIT-D and application guidelines and the feedback received at the workshops. As a result, the final decision is structured to address these issues.
2 RIT-D and application guidelines
The NER requirements for the development of the RIT-D are prescriptive. As a result, we have limited ability to control the simplicity of the RIT-D. The final decision sets out the AER’s final decision and reasons for its approach to the RIT-D and the application guidelines.
2.1 Market benefit classes
The RIT-D process compares credible options in terms of net economic benefit to all those who produce, consume and transport electricity in the NEM. A RIT-D proponent must consider whether each credible option could deliver the classes of market benefits specified under cl. 5.17.1(c)(4) of the NER.
2.1.1 Final decision
Our final decision is to maintain the proposed view set out in the explanatory statement accompanying the draft RIT-D. That is, a RIT-D proponent must include all classes of market benefits in its analysis that it considers to be material when applying a RIT-D. However, the quantification of market benefits is optional for reliability driven projects.
2.1.2 Reasons for the final decision
Submissions made to the draft RIT-D are in general agreement with the approach set out by the AER.[16] However, the Major Energy Users (MEU) submitted that network service providers (NSPs) should be required to calculate market benefits for reliability projects. It submitted that if a high level assessment shows there are no market benefits, then this should be sufficient to exclude a more detailed assessment of the market benefits.[17]
The NER does not oblige a RIT-D proponent to quantify market benefits in every application of the RIT-D. Clause 5.17.1(d) of the NER specifies that:
A RIT-D proponent may, under the regulatory investment test for distribution, quantify each class of market benefits under paragraph (c)(4) where the RIT-D proponent considers that:
(1) any applicable market benefits may be material; or
(2) the quantification of market benefits may alter the selection of the preferred option.
However, we note that the AEMC’s Final Rule Determination qualifies this discretion:
The Commission confirms that it is the intention of clause 5.17.1(d) that the quantification of market benefits is optional under the RIT-D. However this clause must be read in conjunction with 5.17.1(b) which states that:
“(b) ...For the avoidance of doubt, a preferred option may, in the relevant circumstance, have a negative net economic benefit (that is, a net economic cost) where an identified need is for reliability corrective action”.
Therefore, where an identified need is not for reliability corrective action, a RIT-D proponent would need to quantify both the applicable costs and market benefits associated with each credible.
Further, cl.5.17.1(5) of the NER provides that the RIT-D must:
with respect to the classes of market benefits set out in subparagraphs (4)(i) and (ii), ensure that, if a credible option is for reliability corrective action, the consideration and any quantification assessment of these classes of market benefits will only apply insofar as the market benefit delivered by that credible option exceeds the minimum standard required for reliability corrective action.
Therefore, while the quantification of market benefits is not required for a reliability corrective action, distribution network service providers (DNSPs) must quantify market benefits for that part of a credible option that exceeds any minimum reliability standards.
2.2 Customer initiated projects
Clause 5.17.4 of the NER sets out the procedures that RIT-D proponents must follow in applying the RIT-D. The RIT-D procedures outline a three stage process:
§ Non-network options report
§ Draft Project Assessment Report (DPAR)
§ Final Project Assessment Report (FPAR).
It also specifies that stakeholder consultation on the RIT-D project should occur.
2.2.1 Final decision
In accordance with cl.5.17.4 of the NER, a RIT-D assessment is required, even if the conduct of the RIT-D would adversely affect the overall timing of a customer initiated project.
2.2.2 Reasons for the final decision
A RIT-D project can only be exempt from the RIT-D if it falls within the exemption clauses set out under cl.5.17.3(a) of the NER. As a result, we maintain our position as set out in the explanatory statement, that a RIT-D assessment is required, even if the conduct of the RIT-D would adversely affect the overall timing of a customer-initiated project.
The MEU submitted that the RIT-D should include the effects of committed customer projects even if they have not physically commenced.[18] We note that DNSPs account for committed projects in their load forecasts, not just those that have commenced. Therefore, we consider that where a RIT-D assessment is conducted, the effects of committed customer initiated projects should be included.
The Victorian DNSPs submitted that new connection works may be delayed as a result of applying the RIT-D. However, they also submitted that the existing NER provisions may provide an appropriate mechanism for addressing this concern.[19] Some customer-initiated projects may fall under cl.5.17.3(a)(3) of the NER, which specifies: