5 September 2012
RE: Regulatory Arrangements to support the Power Line Bushfire Safety Program
CitiPower and Powercor Australia (Businesses) welcome the opportunity to comment on the Department of Primary Industries' (DPI) consultation paper entitled "Regulatory Arrangements to Support the Power Line Bushfire Safety Program" (Consultation Paper) published on 7 August 2012.
Powercor Australia has been, and remains, fully committed to complying with the:
- Recommendations arising from the Victorian Bushfire Royal Commission (VBRC); and
- Findings of the Powerline Bushfire Safety Taskforce (PBST) established by the Victorian Government.
Powercor Australia is already acknowledged as being at the forefront of worlds' best practice for minimising fires associated with electricity assets and is committed to continuous improvement. In accordance with directions from Energy Safe Victoria (ESV) arising from the VBRC Recommendations and the Powerline Bushfire Safety Taskforce's (Taskforce) findings, Powercor Australia is investing in bushfire mitigation works including:
- The fitting of vibration dampers, armour rods and aerial spacers (VBRC Recommendation 33);
- The "transition program" towards a 37 month network inspection cycle for assets in high bushfire risk areas (HBRA) (VBRC Recommendations 28 and 29); and
- The installation of new generation Automatic Circuit Reclosers (ACRs) on Single Wire Earth Return (SWER) powerlines within the Tolhurst Mapping highest 80 percent fire loss consequence area.
Importantly, the AER's Final 2011-15 Distribution Determination1 did not provide funding for Powercor Australia to undertake this work. This means Powercor Australia has to rely on the pass through provisions of Chapter 6 of the National Electricity Rules (Rules) to seek to recover the costs of this work.
While Powercor Australia successfully sought a cost pass through for the first two investment initiatives, it has not sought to recover costs for investing in new generation SWER ACRs during the current regulatory control period, because certain materiality requirements of the cost pass through provisions under the Rules unduly prevent it from recovering these efficient and prudent costs. This is discussed below in section 3.2.
The purpose of the Consultation Paper is to:
...detail options for the regulation of the remaining components of the VBRC recommendations which have not been addressed, principally arising from Recommendation 27 (regarding the installation of new and replacement network safety assets), as well as the subsequent recommendations of the Powerline Bushfire Safety Taskforce (PBST).
The Consultation Paper states that DNSPs, including Powercor Australia, may be required to install the following assets in relation to Recommendation 27:
- Rapid earth fault current limiters (REFCL) in zone substations (if proven fit for purpose from trials to be conducted);
- New generation ACRs on single wire earth return (SWER) (in the remaining locations); and
- New powerlines, underground or insulated overhead cable, in areas targeted for powerline replacement.
DPI is seeking to develop "regulatory arrangements" to support efficient and prudent investment in these assets over the current and next regulatory control periods.
There are two aspects to the regulatory arrangements being:
- The nature and form of the requirement to undertake the investment; and
- The nature of the cost recovery arrangements.
Each of these matters is discussed below.
3.1. Nature and form of the requirement to undertake the investment
The Consultation Paper
The Consultation Paper outlines three possible options with respect to the nature and form of any requirement for distribution network service providers (DNSPs) to undertake bushfire related expenditure being:
- Regulatory change - this option involves amending the Electricity Safety Act 1998 (Act) and or other subordinate regulatory instruments to require DNSPs to revise their Electricity Safety Management Scheme (ESMS) or Bushfire Mitigation Plan (BMP) to undertake certain investments;
- ESV Directions - this option involves ESV issuing a Direction requiring DNSPs to amend their ESMS or BMP to undertake certain investments; and
- Non-regulatory - this option involves informal consultation between ESV and DNSPs, with the DNSPs incorporating the outcomes of the consultation in their ESMS or BMP.
The Consultation Paper highlights that any future arrangements should satisfy the principles of good regulation as outlined in the Victorian Government Guide to Regulation.
The Businesses' views
The Businesses support option (ii) being that the ESV issues a Direction to them requiring them to amend their ESMS or BMP to undertake certain VBRC investments, subject to:
- ESV being required to consult with the Businesses in developing the Direction; and
- ESV being required to consult in accordance with specific consultation procedures to be developed jointly by ESV and the Businesses.
The benefit of this option is that it balances flexibility, practicality, resource availability and prescription. In particular, it:
- Provides all stakeholders with the required clarity, certainty and predictability; however
- Avoids undue costs and time associated with amending the Act or other regulatory instruments.
3.2. Cost recovery arrangements
The Consultation Paper
The Consultation Paper recognises that Chapter 6 of the Rules provides two mechanisms for cost recovery:
- The Building Block Proposal in the Regulatory Proposal; and
- Cost pass through mechanism, albeit that the paper notes that the "AER approval of a pass-through application usually requires the businesses to demonstrate that the total costs of the change are material. If a pass through mechanism is used, a specific derogation from clause 6.6.1 of the National Electricity Rules may be required to enable the businesses full cost recovery for required bushfire mitigation works."
The Businesses' views
The Businesses agree that Chapter 6 of the Rules, as it currently stands, provides that DNSPs can:
- Seek cost recovery in their Regulatory Proposals, however this requires that the DNSP includes forecast expenditure for the investment initiative in their capital or operating expenditure forecasts. DNSPs can only do this where they know, at the time of preparing their Building Block Proposal, that they are / will be required to undertake the investment initiative in the upcoming regulatory control period; and
- Apply to the AER to seek to recover the cost of the work required to comply with ESV's direction through the pass through provisions of Chapter 6 of the Rules. The Businesses emphasise, however, that a successful pass through application requires the application to satisfy several requirements including:
- The definition of a "positive change event" (i.e. a "service standard" or "regulatory change" event); and
- Demonstrating that the "positive pass through amount"' associated with a "positive change event", "materially increases" the costs of providing direct control services. The Rules do not define the phrase "materially increases" other than to expressly state that the word materially takes its ordinary meaning. The AER has, however consistently considered the relevant materiality threshold to be 1 per cent of annual revenue (based on the Rules for transmission businesses).
The Businesses agree with the Consultation Paper that where a DNSP has not been funded to undertake bushfire related investment in their Regulatory Proposal then pass-through provisions under clause 6.6.1 of the Rules may unduly prevent DNSPs from recovering efficient and prudent costs associated with bushfire related investment as directed by ESV. This is the case for Powercor Australia in relation to the installation of SWER ACRs during the current regulatory control period.
To this end, the Businesses consider that amendments are required to the regulatory framework to ensure that consistent with the requirements of section 7 A(2) of the National Electricity Law (NEL), DNSPs are provided with a "reasonable opportunity to recover at least the efficient costs the operator incurs in providing direct control network services...".
The Businesses agree with DPI that this may best be achieved through a derogation from clause 6.6.1 of the Rules. In particular, the Businesses support the development of a Victorian derogation from clause 6.6.1 of the Rules which would provide a modified version of the pass-through provisions for bushfire related expenditure as directed by ESV. The Businesses consider that any derogation should provide a nominated pass through event for bushfire related expenditure and remove the threshold requirements, including the materiality threshold.
The Businesses consider that this will be particularly relevant for cost recovery of investment in REFCLs. This is because the AEMC's recent draft determination and rules on "Economic regulation of network service providers and price and revenue regulation of gas services"2 proposes to bring forward the Victorian regulatory reset process by 6 months, including the submission of DNSPs' Regulatory Proposals to the AER. This significantly limits the opportunity for the Businesses to undertake a sufficient REFCL trial, which is required in order for the Businesses to incorporate the investment initiative in their capital or operating expenditure forecasts in their Regulatory Proposal for the next regulatory control period.
General Manager Electricity Networks
1 Found at: http://www.aer.gov.au/content/item.phtml?itemId=740898&nodeId=c7b10ddc909d7b32f3d1a1687ce00767&fn=Victorian%20distribution%20determination%20final%20decision%202011%20-%202015.pdf
2 Found at: http://www.aemc.gov.au/electricity/rule-changes/open/economic-regulation-of-network-service-providers.html
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