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Draft Decision - Regulation of Greenfield Electricity

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					                   ICRC
  independent competition and regulatory commission




         Draft Decision
Regulation of greenfield
electricity infrastructure
      development
              Report 10 of 2005
                October 2005
The Independent Competition and Regulatory Commission (the Commission) was established by
the Independent Competition and Regulatory Commission Act 1997 (ICRC Act) to determine
prices for regulated industries, advise government about industry matters, advise on access to
infrastructure and determine access disputes. The Commission also has responsibilities under the
Act for determining competitive neutrality complaints and providing advice about other
government-regulated activities.

The Commission has three Commissioners:

                                Paul Baxter, Senior Commissioner
                                  Robin Creyke, Commissioner
                                  Peter McGhie, Commissioner.

Submissions, correspondence or other enquiries may be directed to the Commission at the
addresses below:

                   The Independent Competition and Regulatory Commission
                                       PO Box 975
                                CIVIC SQUARE ACT 2608

                                      Level 7 Eclipse House
                                       197 London Circuit
                                          CIVIC ACT

The secretariat may be contacted at the above addresses, by telephone on 6205 0799, or by fax on
6207 5887. The Commission’s website is at www.icrc.act.gov.au and its email address is
icrc@act.gov.au or ian.primrose@act.gov.au.

For further information on this investigation or any other matters of concern to the Commission,
please contact Ian Primrose, Chief Executive Officer, on 6205 0779.
Foreword
At the direction of the Treasurer, the Independent Competition and Regulatory Commission (the
Commission) conducted an inquiry into whether or not there are overall economic and welfare
benefits from making greenfield electricity infrastructure works contestable. In conducting this
inquiry, the Commission limited itself to considering only those greenfield electricity
infrastructure connection, expansion and enhancement works where a third party was required to
make a capital contribution. The Commission released its final report in April 2004 and concluded
that there would be a net benefit to the ACT economy if these works were made contestable. 1
Despite the Commission’s findings, the ACT Government decided to maintain the current
monopoly arrangements.
Under the current arrangements, the ACT’s electricity distributor, ActewAGL Distribution
(ActewAGL), is the sole supplier of services associated with the development and expansion of
greenfield electricity distribution infrastructure within the ACT.
As an alternative to competition, the ACT Treasurer, in a statement to the Legislative Assembly
stated that ‘In making this decision [to maintain the current arrangements], I expect the ICRC to
review its regulatory methodology to be sure that appropriate oversight and transparency is applied
to electricity distribution network pricing as it relates to greenfields network infrastructure
developments.’ 2
The Commission released an issues paper as the first step in determining the most appropriate
regulatory methodology to apply to greenfield electricity infrastructure works to ensure that
appropriate oversight and transparency in pricing are achieved. The issues paper (Regulation of
greenfield electricity infrastructure development—Report 6 of 2005) was released in August 2005.
For the purposes of this report, the Commission has adopted the definition of greenfield electricity
infrastructure works as provided by ActewAGL. That is, residential, commercial or industrial
subdivisions that require the installation of the initial electricity network infrastructure for a
subdivision of land that has not previously been reticulated. 3 The provision of a network
connection for a single new installation is not considered a greenfield development.
Submissions on the issues paper were received from ActewAGL. The Commission has considered
these submissions before coming to the conclusions contained in this draft decision.
The Commission is seeking views from interested parties on this draft decision. The Commission
will receive written submissions or arrange to meet with people wishing to contribute to this
process. The Commission will ultimately determine a regulatory approach that, in its view, will
maximise the effectiveness of the regulatory arrangements adopted in the ACT.
Paul Baxter
Senior Commissioner
October 2005




1
  Independent Competition and Regulatory Commission, Final report—Review of contestable electricity infrastructure
works, April 2004.
2
  Quinlan, T, Statement to the ACT Legislative Assembly, 26 August 2004, Week 10 Hansard.
3
  ActewAGL, Response to the ICRC issues paper on regulation of greenfield electricity infrastructure developments,
September 2005, p. 3.



ICRC                               Draft decision: Regulation of greenfield electricity infrastructure development — iii
Contents


Foreword                                                                                 iii


Contents                                                                                 iv


1   Introduction                                                                          1


2   ActewAGL submission                                                                   2
    2.1       ActewAGL’s initial submission                                               2
    2.2       ActewAGL’s supplementary submission                                         3

3   Need for regulation                                                                   5
    3.1       Regulatory test                                                             5
    3.2       Market power                                                                5
    3.3       Maintaining market power                                                    6
    3.4       Countervailing market power                                                 6
    3.5       Current arrangements                                                        7
    3.6       Conclusion                                                                  8

4   Form of regulation                                                                  10


5   Draft decision                                                                      13


6   Call for submissions                                                                15


Glossary and abbreviations                                                              16




iv — Draft decision: Regulation of greenfield electricity infrastructure development   ICRC
1        Introduction

Electricity infrastructure works are works associated with the connection, expansion and
enhancement of the electricity network. This inquiry is concerned with an element of these
electricity infrastructure works: greenfield developments. Greenfield developments are residential,
commercial or industrial subdivisions that require the installation of the initial electricity network
infrastructure for a subdivision of land that has not previously been reticulated. The provision of a
network connection for a single new installation is not considered a greenfield development. Under
the current arrangements, the ACT’s electricity distributor, ActewAGL Distribution (ActewAGL),
is the sole supplier of these works.

The arrangements under which these electricity infrastructure works must be performed are
documented in the Electricity Network Capital Contributions Code (the Code). 4 The Code outlines
the general principles by which ActewAGL may impose a capital contribution charge, which is an
amount payable by the third party for the requested electricity infrastructure works.

The Independent Competition and Regulatory Commission (the Commission) was issued with a
reference by the ACT Treasurer on 1 July 2003 to investigate and provide advice on whether or
not there would be a net benefit to the community as a whole from the introduction of contestable
electricity infrastructure works in the electricity distribution network; that is, whether alternative
suppliers should be able to compete against ActewAGL in the provision of electricity
infrastructure works.

The Commission recommended the removal of restrictions on competition for the provision of
electricity infrastructure works, as the review concluded that there would be a net benefit to the
community. 5 However, the ACT Government decided against removing those restrictions; rather,
it asked the Commission to ‘review its regulatory methodology to be sure that appropriate
oversight and transparency is applied to electricity distribution network pricing as it relates to
greenfields network infrastructure developments.’ 6

The Commission released an issues paper in August 2005 seeking input from interested parties on
the most appropriate form of regulation to apply to greenfield infrastructure work. 7 The draft
decision is based upon the submission received on the issues paper and the Commission’s
own analysis.




4
  Australian Capital Territory, Electricity Network Capital Contributions Code, June 2001. The code can be found on the
Commission’s website www.icrc.act.gov.au and is also available on the CD-ROM release of this report.
5
  Independent Competition and Regulatory Commission, Final report— Review of contestable electricity infrastructure
works, April 2004.
6
  Quinlan, T, Statement to the ACT Legislative Assembly, 26 August 2004, Week 10 Hansard.
7
  Independent Competition and Regulatory Commission, Issues paper—Regulation of greenfield electricity
infrastructure development, August 2005.



ICRC                                Draft decision: Regulation of greenfield electricity infrastructure development — 1
2        ActewAGL submission

ActewAGL provided the only formal submission on the Commission’s issues paper. ActewAGL’s
initial submission raised a number of matters relating to the regulation of greenfield electricity
infrastructure works. A supplementary submission was later received which provided additional
information on the proposed formalised and published application process. 8


2.1      ActewAGL’s initial submission

ActewAGL expressed concern that the Commission was broadening the scope of the current
inquiry to include not only greenfield electricity infrastructure works but also customer initiated
electricity infrastructure works. The Commission has subsequently clarified with ActewAGL that
the current inquiry is solely concerned with considering an appropriate regulatory framework to be
applied to greenfield electricity infrastructure works.

The initial submission stated that the current regulatory framework, specifically the Code,
combined with ActewAGL’s own practices was sufficient to ensure that developers received value
for money and services which effectively met their needs and thus avoided the need for any
additional form of regulation. The submission claimed that the Code ‘limits ActewAGL to
charging customers no more than the additional costs (above the basic standard infrastructure
costs) for providing greenfield infrastructure works. No profit margin may be applied.’ 9 In
addition, ActewAGL claimed that the ‘underlying cost structure, upon which capital contributions
are based, is reviewed thoroughly by the Commission as part of the price reviews conducted for
regulated services every five years.’ 10

ActewAGL argued against the introduction of any of the possible options for regulation outlined in
the issues paper on the grounds that the current arrangements work well, the options presented by
the Commission would increase costs substantially, and the options would undermine the
flexibility of the current approach.

ActewAGL has acknowledged in its submission the desirability of creating a more transparent
application and fee quoting process to assist developers who may not be familiar with the process
in the ACT. ActewAGL has noted, however, that there are a limited number of developers with
whom it contracts as part of greenfield development projects, and more recently the Land
Development Agency (LDA), an ACT Government agency, is taking over more of the new
development work, thus reducing further the number of new players in the market with whom
ActewAGL negotiates.

Notwithstanding these developments, ActewAGL has outlined a proposal aimed at improving
transparency under the current arrangements. The proposal centres on the publication of a more




8
  ActewAGL, Response to ICRC issues paper on regulation of greenfield electricity infrastructure development,
September 2005 and Supplementary response to ICRC issues paper on regulation of greenfield electricity infrastructure
development, October 2005.
9
  ActewAGL, September 2005, p. iii.
10
   ActewAGL, September 2005, p. iii.



2 — Draft decision: Regulation of greenfield electricity infrastructure development                             ICRC
formalised application process. ActewAGL has proposed including the following details in this
revised application process:
•      application requirements of the applicant/customer
•      target timeframes for provision of preliminary design
•      target timeframes for provision of an ‘indicative’ offer (if requested)
•      target timeframes for provision of a firm offer
•      appropriate ‘hold’ and ‘reset the clock’ mechanisms (to take account of customers changing
       their requirements).

ActewAGL has proposed that before these policies are published they be submitted to the
Commission for endorsement. 11


2.2        ActewAGL’s supplementary submission

The supplementary submission proposed the following alterations to the current arrangements for
each of the four main stages involved in a greenfield development (development planning,
application, detailed design and construction), as well as the publication of information on capital
contribution charges and a proposed monitoring program.

2.2.1      Stages of greenfield development

Development planning
The development planning stage involves the initial submission by the developer, to the ACT
Planning and Land Authority (ACTPLA), of the broad concept plan for the development of an
entire estate. The supplementary submission proposed establishing a requirement that the draft
concept plan also be provided to ActewAGL to encourage consultation between the developer and
ActewAGL in the planning of any developments. In addition, it proposed that the lodgement
procedures include provision for information requirements to be formalised and for the
establishment of indicative timeframes for ActewAGL to respond to the draft concept plan.
ActewAGL also proposed that there be a formal requirement that it receive a copy of the concept
plan once the plan is approved.

Application
The application phase consists of a formal application from the developer to ActewAGL.
The supplementary submission from ActewAGL proposed establishing a specific ‘greenfield
development application’ form that would define the minimum information to be submitted
to ActewAGL, and that there be a requirement for ActewAGL to acknowledge receipt of
the application.




11
     ActewAGL, September 2005, p. 13.



ICRC                                Draft decision: Regulation of greenfield electricity infrastructure development — 3
Detailed design
During the detailed design phase, ActewAGL and the developer work together to establish the
most appropriate detailed design for a given development. The supplementary submission detailed
a number of instances where establishing target timeframes and informational requirements for
both ActewAGL and the developer would help to facilitate the development of a detailed design.
Construction
The supplementary submission outlined several areas in the construction phase where increased
coordination between ActewAGL and developers would improve this stage of the process. The
supplementary submission focused on creating a formal requirement for the developer to submit a
proposed works program to ActewAGL, the establishment of an indicative timeframe for
ActewAGL to respond to the developer with estimated commencement dates, and the
formalisation of the arrangements surrounding capital contribution payments.

2.2.2    Capital contribution charges

The supplementary submission from ActewAGL proposed the publication of standard charges per
dwelling for greenfield electricity infrastructure works. As the current set of charges circulated
within the industry includes streetlighting, a contestable service, ActewAGL proposed that a
separate electricity infrastructure only rate also be published.

2.2.3    Monitoring

ActewAGL proposed the inclusion of a monitoring arrangement as part of the regulatory
framework submitted in the supplementary submission. The proposed monitoring arrangement
included informing the Commission of the policies and procedures for making an application and
agreeing prices and timetabling before these policies and procedures are first published, and
notifying the Commission at the beginning of each financial year of any changes to the charge
rates or application processes.

ActewAGL submitted that it would be possible for the publication of the proposed development
details and implementation of the monitoring regime as outlined above to come into effect from
1 July 2006, and that the current arrangements could be maintained until then.




4 — Draft decision: Regulation of greenfield electricity infrastructure development           ICRC
3        Need for regulation

Before the Commission commits to a form of regulation to apply to greenfield electricity
infrastructure works, either along the lines proposed by ActewAGL or via an alternative approach,
it is necessary to consider whether there is a need to regulate these works.


3.1      Regulatory test

In considering whether there is a need to regulate the provision of greenfield electricity
infrastructure works, the Commission has developed a regulatory test. The test has been set out as
a series of questions:
•   Is there sufficient competition to prevent the potential abuse of market power?
•   Is there a likelihood of sufficient competition in the future to prevent the potential continuing
    abuse of market power?
•   Is there any countervailing market power exhibited by developers? That is, can developers
    influence the price of the services they receive?
•   Are the current regulatory arrangements adequate to alleviate the need for further regulation?

Where there is evidence of one or more of these characteristics in the market, it may indicate that
there is no need for further regulation.


3.2      Market power

The regulation of markets is required to guard against the possible abuse of market power that can
exist when competition is not feasible or effective. A firm that is a dominant or monopoly supplier
can be in a position to exert market power and subsequently extract monopoly rents or monopoly
profits. In the context of the provision of greenfield electricity infrastructure works by ActewAGL,
given that it is the sole provider, it is necessary to consider whether ActewAGL is currently in a
position from which it can exert market power when providing those works.

ActewAGL is the sole supplier of greenfield electricity infrastructure works in the ACT. As such,
ActewAGL is not subject to the pressures that exist in competitive markets and is in a position to
exert a degree of market power. The pressure that exists in competitive markets forces firms
continually to seek efficiencies, which they are able to pass on to consumers. The Commission
notes that ActewAGL has, in dollar terms, maintained the same schedule of charges for the past
ten years. 12 This implies that, assuming initial prices were set at an efficient level, ActewAGL has
been able to obtain efficiencies which it has, at least to some extent, passed on to customers.
However, the lack of competitive pressures may act to reduce the extent to which ActewAGL
seeks to achieve further efficiencies and may increase the potential for the abuse of market power.




12
   ActewAGL, Response to ICRC issues paper on regulation of greenfield electricity infrastructure development,
September 2005, p. 6.



ICRC                                Draft decision: Regulation of greenfield electricity infrastructure development — 5
The demand for greenfield electricity infrastructure works is relatively inelastic; that is, the level
of demand for these works is not highly sensitive to changes in price. Thus, prices could
potentially be increased to a level above cost without a corresponding reduction in the quantity
demanded. This is a result of the relatively insignificant amount that infrastructure works
contribute to the final developed price of the land. In addition, these charges are simply passed
through to homebuyers, so there is little incentive for developers to attempt to minimise the
charges paid for these works. This further increases the ability of ActewAGL to exert market
power when charging for greenfield electricity infrastructure works.

The Commission takes the view that, because ActewAGL is the sole supplier of greenfield
electricity infrastructure works and because the product supplied is inelastic, it is in a position to
exert a degree of market power when providing these services. Therefore, there may be a need to
regulate the services provided by ActewAGL unless there is an imminent threat of competition in
the market for the provision of greenfield infrastructure works.


3.3      Maintaining market power

Given that contestability has not been adopted by the ACT Government, the sole-supplier status of
ActewAGL is set to continue. The Commission expects that ActewAGL will therefore also
continue to have the potential to exploit its position as the monopoly supplier of greenfield
electricity infrastructure works for the foreseeable future.

It can therefore be concluded that for the foreseeable future it is unlikely that competitors will
emerge for these services in the ACT with the ability to act as a constraint on the exercise of
market power by ActewAGL. Unless there is a degree of countervailing market power that enables
developers to influence the price charged by ActewAGL, there may be a need to regulate the
provision of these services.


3.4      Countervailing market power

Countervailing market power is exhibited by consumers, in this case developers, if they are able
effectively to influence the price and conditions under which the required services are provided.
The ability to exert countervailing market power depends on the size of the consumer and the size
of the market, with larger consumers generally able to exert greater influence over the price paid
and service received.

In order to understand the points at which countervailing market power might be exercised, it is
necessary to set out the process of greenfield development. The Commission understands that the
design process consists of four discrete stages. The first stage is the development planning stage.
The developer is responsible for preparing a broad concept plan, which it submits to ACTPLA.
The broad concept plan includes details on the density of the development, any parks, shops or
schools that are envisaged and other general characteristics of the development. If the concept plan
is accepted by ACTPLA, the design is forwarded to ActewAGL, which provides input on the plan
to ensure that it is feasible and will minimise any future complications for the electricity
network rollout.

The second stage of the development process involves a formal application by the developer to
ActewAGL. Once the formal application has been accepted, the third stage involves a detailed
design process in which the developer and ActewAGL work in conjunction to establish the most



6 — Draft decision: Regulation of greenfield electricity infrastructure development                ICRC
appropriate design and timeframes for construction. A firm quote is provided at this stage, based
on a fixed schedule of charges produced by ActewAGL. The schedule, while not published
formally, is widely distributed within the industry and sets out a fixed price per block (which
varies depending on the size of the block). Once the detailed design has been completed, the final
stage of the process, construction, then proceeds.

Based on this outline of the process involved, it is clear that the developer has a degree of input in
the design process. However, while there is a high degree of consultation between the developer
and ActewAGL in respect to the design process and appropriate timeframes, there appears to be no
opportunity for the developer to influence the price of works received, as they are calculated on the
basis of a fixed cost per block. The lack of information provided by ActewAGL on the cost
components that contribute to the fixed cost per block schedule further reduces the ability of
developers to negotiate a price.

The ACT Government has stated that it intends that the Land Development Agency will undertake
a greater proportion of land development activities in the ACT. 13 The LDA, an ACT Government
agency, will therefore become a major developer in the ACT. The LDA will predominantly
develop land independently or in conjunction with construction companies as part of a joint
venture. As the LDA will become responsible for the vast majority of development activities in the
ACT, it could be expected that, given its size, it would be able to exert a degree of countervailing
market power over terms and conditions when obtaining greenfield infrastructure works.

In markets such as this, a simple test for countervailing market power would be the observation of
negotiated prices. Given that ActewAGL charges a fixed cost per block, there is no evidence of
negotiated prices and therefore no evidence to date of the existence of any exercise of
countervailing market power.

Looking forward, given the ACT Government policy of adopting a centralised procurement
agency, ACT Procurement Solutions, to handle all ACT Government procurement, there is an
expectation that the LDA would have the potential to exhibit a degree of countervailing market
power. It is envisaged that, as part of this shift towards a centralised procurement agency, the
terms upon which greenfield infrastructure works are undertaken would be examined by ACT
Procurement Solutions. However, in the absence of evidence that ACT Procurement Solutions has
successfully been able to negotiate reasonable prices when requesting greenfield electricity
infrastructure works, the Commission must infer that a case for regulation exists.


3.5      Current arrangements

In its submission on the issues paper, ActewAGL claimed that the current regulatory arrangements
were adequate to prevent overcharging for greenfield infrastructure works. ActewAGL argued that
the Code limits it to charging no more than the additional costs of providing such works. 14 In
addition to the limits imposed by the Code, ActewAGL stated that the underlying cost structure




13
  Corbell, S (MLA), Minister outlines latest land strategies, media release, 31 May 2005.
14
  ActewAGL, Response to ICRC issues paper on regulation of greenfield electricity infrastructure development,
September 2005, p. 10.



ICRC                                Draft decision: Regulation of greenfield electricity infrastructure development — 7
upon which capital contributions are based is reviewed thoroughly by the Commission as part of
the five-yearly price reviews. 15

Under Section 3.3 of the Code, ActewAGL is able to charge a capital contribution of ‘no more
than the additional costs incurred’ for works that are completed to a standard higher than the basic
standard. However, the Code provides no guidance on the actual costs to be included and on
whether these are efficient costs.

The argument that the Commission reviews capital contributions when completing an
electricity distribution price determination is misplaced. The Commission investigates and
determines ActewAGL’s maximum average revenue cap for prescribed electricity distribution
services. However, greenfield electricity infrastructure works are not a prescribed service, and
the revenue collected for these works is not reviewed. Furthermore, while the Commission forms
a view on the efficiency and prudence of the total capital and operating expenditure, there is
no investigation of the link between what the Commission may determine is efficient and
prudent capital expenditure and what has been charged under the capital contribution
arrangements. Thus, there is no link between the reviews undertaken by the Commission and the
level of the capital contribution charged.

Therefore, the Commission does not consider that either the Code or the Commission’s price
reviews necessarily prevent ActewAGL from abusing its position as the sole supplier of greenfield
electricity infrastructure works. As explained, the Commission does not subject to review the
prices charged for capital contributions as part of its price-setting arrangements as it does for other
regulated services.


3.6      Conclusion

The Commission has established a regulatory test to determine if there is a case for regulating
the provision of greenfield electricity infrastructure works. The test has investigated whether
ActewAGL has the potential to exert a degree of market power and has concluded that, as
ActewAGL is the sole supplier of these works and as the demand for greenfield electricity
infrastructure works is relatively inelastic, there is an opportunity for ActewAGL to exert
market power.

Second, the Commission considered the extent to which any market power is likely to continue in
the future. Given the policy direction from the ACT Government that ActewAGL remain as the
sole supplier of electricity infrastructure works, the Commission believes there is potential for the
use of market power by ActewAGL.

Third, the Commission concluded that, as developers have no opportunity to influence the fixed
price schedule, there is no evidence of any countervailing market power.

Finally, the current regulatory arrangements were examined to assess whether they are sufficient to
protect against the abuse of market power. The Commission concluded that the current




15
   ActewAGL, Response to ICRC issues paper on regulation of greenfield electricity infrastructure development,
September 2005, p. 10.



8 — Draft decision: Regulation of greenfield electricity infrastructure development                              ICRC
arrangements would not necessarily prevent the potential abuse by ActewAGL of its position as
the sole supplier of greenfield electricity infrastructure works.

The Commission has therefore concluded that there is a need to regulate the provision of
greenfield electricity infrastructure works in the ACT.




ICRC                          Draft decision: Regulation of greenfield electricity infrastructure development — 9
4        Form of regulation

In its investigation of the possible need for regulation, the Commission has concluded that there
is a need to regulate the activities of ActewAGL in the provision of greenfield electricity
infrastructure works.
The Commission recognises the importance of minimising the cost of regulation upon the
regulated business and is mindful of the best practice principles identified by ActewAGL, which
include that regulations should:
•   employ the minimum regulation necessary to achieve the objective
•   not be unduly prescriptive
•   be accessible, transparent and accountable
•   be integrated and consistent with other laws
•   be capable of being communicated effectively
•   impose a compliance burden proportionate to the problem
•   be enforceable. 16

The issues paper identified four broad regulatory options that could be applied to greenfield
infrastructure works. These options ranged from a relatively light-handed approach through to a
more heavy-handed approach. At the ‘light-handed regulation’ end of the spectrum, one option
was to maintain the current arrangements (that is, no direct form of price oversight), with the Code
providing guidance on the pricing principles to be adopted. An alternative or possible additional
response to the need for regulation was to require an increase in the disclosure of information on
prices and terms and conditions. This was proposed as a way of creating greater transparency for
the developer and potentially improving their bargaining position.
A third option suggested was for the Commission to approve the price and service policies under
which greenfield infrastructure work is undertaken. At the more ‘heavy handed’ end of the
regulatory spectrum, it was suggested that the Commission formally review and determine
individual price and service standards. This form of regulation could be conducted in either an
ex-ante (predetermined) or ex-post (retrospective) manner.
From the options outlined above, a more light-handed approach may reduce compliance costs and
thereby minimise the regulatory burden both on the regulated business and on the regulator.
However, the advantages of a light-handed approach may be outweighed by the additional
accuracy and certainty that could be gained from a more detailed investigation, which would allow
a fuller understanding of the cost structure of the business and possibly provide greater regulatory
certainty for ActewAGL.
In determining the most appropriate form of regulation to apply, it is prudent for the Commission
to consider approaches adopted in other jurisdictions.




16
   ActewAGL, Response to ICRC issues paper on regulation of greenfield electricity infrastructure development,
September 2005, p. 15.



10 — Draft decision: Regulation of greenfield electricity infrastructure development                             ICRC
When requesting augmentation work in Victoria, customers can request that the distributor seek
tenders for the completion of the work. Similar arrangements exist in South Australia. In New
South Wales, work for which a capital contribution is required is generally contestable. The Office
of the Tasmanian Energy Regulator is in the process of reviewing the arrangements in Tasmania.
Currently, the electricity distributor does not have an exclusive right to carry out works in that
state, but current work practices limit the extent to which customers can seek alternative
contractors to complete works. In Queensland, contestability is not mandated, although
Energex, the electricity distributor for southeast Queensland, employs contractors to undertake
some works. 17 , 18
The preference for contestability in the practices adopted in other jurisdictions means there is
limited guidance to the most appropriate form of regulation to apply to greenfield electricity
infrastructure works in the ACT.
The Commission is therefore bound to develop its own regulatory scheme. Significant
consideration should be given to the costs and benefits of the alternative forms of regulation, as it
is necessary to ensure that the compliance burden is proportionate to the problem.
In the past three years, the total value of greenfield capital contributions made by developers has
been approximately $3.8 million. 19 It is expected that the annual amount, while variable, will stay
relatively constant or perhaps reduce slightly over the next several years. 20 Given the relatively
minor amount of capital contributions when considered against total revenue gained from
distribution services (approximately 1%), the Commission believes that a heavy-handed regulatory
approach may be too prescriptive. The Commission takes the view that a light-handed approach is
more appropriate.
A light-handed approach to regulation suggested in the issues paper was to increase the disclosure
of information to developers. ActewAGL, as part of its initial and then supplementary submissions
on the issues paper, proposed the publication of a more formalised and transparent application
procedure, combined with the publication of a set of standard charges per dwelling for electricity
infrastructure works.
A monitoring regime was also suggested, to track the progress of an application and the approval
process and to assist developers in their planning and implementation. The Commission supports
the publication of additional information regarding the development process, as publication would
increase certainty both for ActewAGL and for developers in regard to the responsibilities of each
party and target timeframes for the completion of works. This goes, in part, to the issues that were
raised in submissions to the Commission’s earlier report to government on this matter.
In addition to the publication of information about responsibilities and timeframes, the
Commission believes that the methodology used by ActewAGL to calculate the fixed schedule of
charges, including the final charges, should be formally published. This would include a detailed




17
   Office of the Tasmanian Energy Regulator, Discussion paper—Contestable electricity infrastructure works, July 2005,
p. 17 ‘Position in other jurisdictions’.
18
   ActewAGL also uses contractors to undertake greenfield works in the ACT. However, as ActewAGL continues to
charge for this service using a standard charge-out rate that has not changed for ten years, it is not evident that individual
developers benefit from contestability in the bidding for individual greenfield projects.
19
   ActewAGL, Response to ICRC issues paper on regulation of greenfield electricity infrastructure development,
September 2005, p. 7.
20
   Discussions with ActewAGL.



ICRC                                 Draft decision: Regulation of greenfield electricity infrastructure development — 11
breakdown of the component costs that contribute to the final fee charged. Furthermore, the
methodology used to determine the ‘extra/over cost’ contribution associated with undergrounding
assets should also be formally published, with similar details. The Commission understands that
these methodologies and charges are ‘well known’ within the industry. Therefore, the Commission
envisages that the formal publication of this information would impose little additional burden on
ActewAGL and would significantly increase the transparency of the development process to all
parties (including any new entrants to the property development industry). It would also assist the
LDA to meet its obligations for transparency in the awarding of contracts for greenfield
development works to ActewAGL.
Greater transparency of the process and the standard prices charged would go some way towards
ensuring that ActewAGL is accountable for its practices relating to the undertaking of greenfield
development projects. Given ActewAGL’s ability to exert market power and the lack of any
countervailing market power exhibited by developers, the Commission considers that, in addition
to the formal publication of the development process and related charges, there is still a need to
provide regulatory oversight of charges. Consistent with the principles identified by ActewAGL of
employing the minimum form of regulation and not being unduly prescriptive, the Commission
considers that the adoption of a monitoring approach to the regulation of greenfield electricity
infrastructure works may be appropriate.
The Commission envisages that under a monitoring approach ActewAGL would provide the
Commission with information regarding any changes to either the development process or the
schedule of charges. The Commission expects that, if ActewAGL were to alter the responsibilities
and timeframes associated with the development process, the information submitted to the
Commission would detail the reasons for the change and the likely impact on developers. If
ActewAGL were to alter the charges for greenfield electricity infrastructure works, the information
would include a description of how the cost components that contribute to the overall price
charged have changed. It is expected that ActewAGL would inform the Commission of these
changes before they are publicly released.
Furthermore, the Commission considers that including greenfield electricity infrastructure works
in the review of capital and operating expenditure at the time of the next electricity distribution
price review may be appropriate. The next electricity distribution price decision is due to
commence on 1 July 2009.
The Commission considers that the approach outlined, which combines increased disclosure of
information and monitoring of prices, would adequately address the need to regulate the provision
of greenfield electricity infrastructure works. The Commission believes that such an approach
would not impose significant additional costs on ActewAGL or developers, and would be
transparent and simple to implement. Furthermore, an approach such as that outlined would
maintain the flexibility of the development process, which was identified by ActewAGL as being
crucial to any form of regulation to be applied to greenfield infrastructure works. It would also
allow a smooth transition to a national regulatory framework under the Australian Energy
Regulator (AER). It is expected that the AER will at some stage gain responsibility for the
regulation of retail and distribution functions for both electricity and gas, and hence become
responsible for greenfield electricity infrastructure works. 21




21
   A public consultation paper recently released by the Ministerial Council on Energy asks for input on the proposed shift
to a national regulatory framework. The consultation paper provides a discussion of capital contributions. See



12 — Draft decision: Regulation of greenfield electricity infrastructure development                                ICRC
5        Draft decision

The Commission was instructed by the ACT Treasurer ‘to review its regulatory methodology to be
sure that appropriate oversight and transparency is applied to electricity distribution network
pricing as it relates to greenfields network infrastructure developments.’ 22 In considering the most
appropriate regulatory framework, the Commission initially investigated whether there was a need
to regulate the provision of these services. The Commission concluded that, given ActewAGL’s
position as the sole supplier of electricity infrastructure works, it is in a position to exert market
power. Furthermore, it was thought likely that this position would remain unchanged for the
foreseeable future. There was no evidence of an ability of developers to influence the price of
greenfield electricity infrastructure and, therefore, no evidence of any countervailing market
power. Finally, it was found that the current arrangements were not sufficient to ensure against the
abuse of this power. Therefore, there is a need for additional regulatory oversight in the provision
of greenfield electricity infrastructure works.

The Commission is conscious of the burden that regulation causes both on the regulated business
and on the regulatory body and, where appropriate, prefers to adopt a light-handed form of
regulation. After consideration of the ActewAGL proposals and the relative size of the works
under consideration and its own analysis, the Commission’s proposed light-handed form of
regulation is as follows:
•   ActewAGL must formally publish on its website, and make available on request, guidelines
    for the greenfield electricity development application process. The information must clearly
    set out the responsibilities of ActewAGL and include target timeframes for the provision of
    responses and the completion of works by ActewAGL.
•   ActewAGL must formally publish on its website, and make available on request, the
    methodology used to calculate the schedule of standard prices it intends charging for
    greenfield electricity infrastructure works, as well as the final fee to be charged. The
    publication should include the component costs that contribute to the final fee charged.
•   ActewAGL must formally publish on its website, and make available on request, the
    methodology, including the costs contributing to the final fee charged, used to determine the
    ‘extra/over cost’ contribution associated with undergrounding assets.
•   If ActewAGL wishes to alter the development guidelines or the fee charged for works, it must
    inform the Commission of the relevant changes to the development process or schedule of
    charges before they are publicly released. The Commission envisages that, if ActewAGL
    proposes to alter the responsibilities and timeframes associated with the development process,
    the submission must detail the reasons for the change and the likely impact on developers. If
    ActewAGL proposes to alter the charges for greenfield electricity infrastructure works, the
    submission must include a description of how the cost components that contribute to the
    overall price charged have changed.




www.mce.gov.au, Gilbert + Tobin & NERA, Public consultation on a national framework for energy distribution and
retail regulation, May 2005.
22
   Quinlan, T, Statement to the ACT Legislative Assembly, 26 August 2004, Week 10 Hansard.



ICRC                             Draft decision: Regulation of greenfield electricity infrastructure development — 13
•   The Commission intends including greenfield electricity infrastructure works in its review of
    capital and operating expenses at the time of the next electricity distribution price
    determination in 2009.

The Commission requires ActewAGL to have these arrangements in place by 1 July 2006 and to
notify the Commission at the beginning of each financial year of the rates and processes applicable
for that financial year.

In order to implement the draft decision, the Commission intends working with ActewAGL to
either amend its utility licence or vary the Code in order to formalise the arrangements for the
disclosure of the relevant information. The Commission expects that this will result in an
additional degree of certainty for developers, ActewAGL and the Commission and provide further
clarification about the information to be published.

The Commission believes the light-handed approach outlined above is consistent with principles of
good regulation. The Commission considers that this approach employs the minimum regulation
needed to ensure against abuse of market power by ActewAGL in the provision of greenfield
electricity infrastructure works. The combination of formally publishing details of the development
process, the methodology and schedule of prices charged for greenfield works, and the monitoring
of these policies and charges in the future, is not unduly prescriptive, is transparent and is
consistent with the shift towards a national energy regulator. The approach imposes a compliance
burden proportionate to the issue being addressed and is easily understood by affected parties. In
addition, the approach maintains the flexibility of the development process, which was identified
by ActewAGL as being crucial to any form of regulation to be applied to greenfield infrastructure
works.




14 — Draft decision: Regulation of greenfield electricity infrastructure development          ICRC
6       Call for submissions

The Commission invites submissions from interested parties on a means of regulating this
monopoly activity and, in the first instance, to respond to the issues raised in this paper.

The Commission proposes to adopt the following timeframes for the remainder of the process:

Submissions due on draft decision:         2 December 2005

Final decision due for release:            23 December 2005



Submissions, correspondence or other enquiries may be directed to the Commission at the
addresses below:

                    The Independent Competition and Regulatory Commission
                                        PO Box 975
                                 CIVIC SQUARE ACT 2608

                                        Level 7 Eclipse House
                                         197 London Circuit
                                            CIVIC ACT

The secretariat may be contacted at the above addresses, by telephone on 6205 0799, or by fax on
6207 5887. The Commission’s website is at www.icrc.act.gov.au and its email address is
icrc@act.gov.au or ian.primrose@act.gov.au.

For further information on this investigation or any other matters of concern to the Commission
please contact Ian Primrose, Chief Executive Officer, on 6205 0779.




ICRC                          Draft decision: Regulation of greenfield electricity infrastructure development — 15
Glossary and abbreviations

ACT                            Australian Capital Territory

ActewAGL                       ActewAGL Distribution

ACTPLA                         Australian Capital Territory Planning and Land Authority

AER                            Australian Energy Regulator

capital contribution           an amount payable by a third party for requested development or
charge                         augmentation of the electricity network

Code                           Electricity Network Capital Contribution Code

Commission                     Independent Competition and Regulatory Commission

ICRC Act                       Independent Competition and Regulatory Commission Act 1997

LDA                            Land Development Agency




16 — Draft decision: Regulation of greenfield electricity infrastructure development             ICRC

				
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