Energy costs may soon shrink if a bill before the Senate allows the abolition of transmission and networks’ right to appeal decisions relating to their operational costs.
The Limited Merits Review (LMR) allows energy transmission and infrastructure companies to appeal to the Australian Competition Tribunal (ACT) any Australian Energy Regulator rulings on revenue or access agreements which they believe have a negative impact. It also allows state and territory bodies to appeal AER decisions.
In the last decade, electricity prices have doubled and the Australian Competition and Consumer Commission chief executive Rod Sims said network costs were the largest contributor, accounting for 40 per cent of all power bills.
The proposed abolition has been welcomed by consumers and some corners of the industry, saying it will reduce prices due to cutting process delays.
“The LMR effectively gave the companies the option with no downside risk to appeal any bits of the AER’s decision that they didn’t like to the Australian Competition Tribunal,” the Grattan Institute’s energy program director Tony Wood told Fairfax Media.
“Because the LMR was limited, it meant the companies could cherry-pick bits of the decision they didn’t like – very one-sided,” he said.
“It’s hard to see any real negative result [of this bill’s abolition].”
Earlier this year the Australian Energy Market Operator listed the abolition or reforms to the existing LMR as one of its key goals to ensure greater economic regulation and efficiency in the energy sector.
“The ACT effectively became another layer of regulation with fewer resources,” Mr Wood said.
According to the Australian Energy Regulator, appeals against its decisions between 2008 and 2013 resulted in revenue increases of approximately $3.5 billion.
The quashing of the LMR was supported by customer lobby groups. “We are hopeful that the abolition of the Limited Merits Review Framework will signal the end of a costly and counter-productive period in network regulation, ” Energy Consumers Australia chief executive Rosemary Sinclair said.
Consumer Action Law Centre chief executive Gerard Brody said: “Removing LMR will take away a cash-grab mechanism for networks that has diverted decisions away from the long-term interests of consumers and increased prices.”
It’s hard to see any real negative result [of this bill’s abolition].
Tony Wood, Grattan Institute
However, energy companies said the abolition of the bill would lead to higher consumer prices, with gas and electricity supplier Jemena stating that “abolishing the LMR will not advance customers’ long-term interests”.
TransGrid executive general manager of regulation, Tony Meehan, said the LMR acts as a series of checks and balances on the Australian Energy Regulator.
“Abolishing the review mechanism would remove accountability from a system which vests a significant amount of discretion in the regulator,” a TransGrid spokeswoman said.
“The review mechanism allows engineers the ability to challenge any technical misunderstandings about how the system is operated.
“If these go unchallenged, they could lead to lower reliability and a less competitive wholesale market which creates poor outcomes for consumers.”
Spark Infrastructure, which holds large stakes in distribution networks in Victoria, New South Wales, and South Australia warned of the damage to investment if the LMR was removed.
“The willingness of the Australian government to intervene in established market governance arrangements to deliver a short term political objective will force both debt and equity investors to seriously reconsider their view of the level of sovereign risk in Australia.”
However, it is likely the bill will pass.
“Logically the bill should pass since it would mean the companies, or anyone else, would only be able to appeal to a judicial review based on failure of the AER in regard to the law, and not trigger a second level of debate on a judgment based on expert opinion,” the Grattan Institute’s Mr Wood said.
“It should be a better result for consumers. If the companies now put all their effort into the AER review, then it will ultimately be better for them as well.”
The Senate Environment and Communications Legislation Committee will produce a report on the inquiry on October 16.