States asked to support energy review amid investment fears

Investment in electricity and gas networks could be stifled if new restrictions on price ruling appeals go ahead.

Electricity prices forecast.

New investments in electricity and gas networks could be stifled if proposed new restrictions to the ability of energy businesses to appeal the regulator’s pricing rulings go ahead, the Turnbull government has been warned.

The peak infrastructure group has written to Environment and Energy Minister Josh Frydenberg, escalating the fight against the plan to overhaul the process known as the “limited merits review” that allows energy networks to appeal decisions by the Australian Energy Regulator.

The move by Infrastructure Partnerships Australia comes as Mr Frydenberg meets his state counterparts today, when he will push the states to fully get behind the reforms, aimed at stopping networks “gaming” the system by appealing the amount they can recoup in revenues.

“Australia’s energy markets are under substantial pressure, following major price volatility, the South Australian blackouts and the extended failure of the Basslink cable connecting Tasmania to the NEM,” IPA chief executive Brendan Lyon writes in the letter.

“Investors will look to the predictability and stability of Australia’s regulatory environment to assess the risk of making new investments in Australia’s energy sector, with a strong merits review regime being a key element of this assessment. Uncertainty about the ‘rules of the game’ will only increase the rate-of-return required by investors who fear material changes affecting their investment performance over time.”

But Mr Frydenberg said the federal government wanted to help rein in network costs to consumers.

Productivity Commission chair­man Gary Banks last week took aim at government interventions and subsidies in the energy sector as the closure of Victoria’s Hazelwood power station sparked fears of further electricity price hikes.

And a new paper by the Energy Policy Institute of Australia warns of policy uncertainty, soaring costs and “highly damaging” interventions in the market.

The paper takes aim at “disharmony” between Canberra and the states over the causes of the energy crisis and its solutions.

“Australia has failed all three of its energy industry aspirations: the price of its energy is for many customers unaffordable, it has been unable to satisfactorily integrate energy and climate policy and, most recently, its energy security is now under a heavy cloud,” the paper says.

The institute says a national energy commission should be set up under a single commonwealth law to encourage investment.

The proposed reforms to the limited merits review regime is expected to be a key item on the agenda for today’s COAG Energy Council meeting.

In December energy ministers agreed to in-principle reforms to the regime. While Canberra wanted to dismantle the limited merits review process, it could not get a consensus on this from the states and instead energy ministers did agree that reform was needed.

The in-principle December agreement included higher financial thresholds to appeal, stronger requirements to show consumers would not suffer serious long-term detriment, stricter time­frames and tighter grounds for review.

The agreement also included introducing a binding rate-of-return guideline, with “relevant elements” of the Australian Energy Regulator’s decisions on this to be immune to merits review.

This is significant as the rate of return is the most material input to the revenue of an energy network and is often hotly contested between the networks and the regulator. The letter by the IPA, which has members from both the public and private sectors, insists that being able to contest the merits of decisions, especially on the returns, is “fundamental to investor confidence”.

But Mr Frydenberg said the federal government wanted to help curb network costs and hoped the commitments made in December “will be implemented in full as officials continue to work through the details”.

“The AER is an expert body which is best placed to make an appropriate assessment of the rate of return,” Mr Frydenberg said.

“To see relatively brief hearings of the Competition Tribunal overturn years of expert deliberation of the AER, increasing the cost to households by billions of dollars, is legitimately questioned by consumers.” He has previously said that between 2008 and 2012 decisions through the limited merits review regime had meant networks collected an extra $3.3 billion from customers above what the regulator had decided.

NSW Energy and Utilities Minister Don Harwin said the state government recognised the need for reform of the review process. “We strongly support improvements to reduce the number of appeals and put downward pressure on prices,” Mr Harwin said.

“There has been great progress on the reforms. However, there are significant issues which still need to be worked through to avoid negative consequences for consumers and investment.”

Queensland Energy Minister Mark Bailey said the state supported reforms to improve the limited merits review process because amendments made in 2013 were not working as intended.

Mr Bailey said today’s Energy Council would consider detail of the “significant and immediate reforms to tighten the process and reduce appeals” agreed to in-principle in December. “Queensland supports reforms which put consumer interests front and centre.”