Regulation of network services Recent experience in the Australian National Electricity Market FSR Executive Seminar - 11 June Florence David Swift Executive General Manager Corporate Development

2 ABOUT THE AUSTRALIAN ENERGY MARKET OPERATOR - AEMO Delivers operational, development and planning functions across both gas and electricity markets within the one organisation. Operates the power grid and runs the Australian national electricity market (NEM) Ownership: 60% Government, 40% Market Participants. Member of GO15: Seeking to share experience and best practice in developing the grid of the future.

RECENT EXPERIENCE IN AUSTRALIA Australians have traditionally enjoyed relatively low electricity prices At the turn of the century they were among the lowest in the OECD average From 2007 to 2012 they rose sharply - by between 70% and 100% in different regions of the NEM Price rises for electricity were well above inflation Rises in network costs were the largest contributor to retail price increases

4 ELECTRICITY PRICE INDICES FOR HOUSEHOLDS AND BUSINESSES, AUSTRALIA

5 ELECTRICITY AND CPI PRICE INDICES FROM SEPTEMBER 1980 TO JUNE 2012

6 IMPACTS OF RISING PRICES Higher prices have delivered: Declining demand Increase in solar PV generation Political and policy makers attention and changes to the regulatory arrangements: o Independent forecasting o Economically efficient reliability standards o More scrutiny on investment decision making and discretion to the regulator o Modified appeals mechanism o Refinements to regulatory incentives especially on capital expenditure

7 OUTCOMES IMPROVING Improvements have been made and the rate at which retail prices were rising has slowed Expenditure on network augmentation in particular is now more efficient There is a new awareness by the network businesses of the potential long term impacts of changing customer behaviour in response to rising prices

8 NEW CHALLENGES In a changing environment, networks face: A continuing outlook of low or declining load growth Ongoing cost pressures – including the need to refurbish or replace ageing assets Continuing growth of embedded generation Expected growth in customer responsiveness A changing role Poor pricing structure which does not recognise the services networks provide

9 THE FUTURE Recent reforms have focussed on reigning in excessive expenditure by network businesses While this has delivered better outcomes, challenges remain New world will be more customer driven and will challenge the view that networks are a safe monopoly To succeed in the future, networks and regulators need to respond to the changing business environment More efficient pricing and effective regulation will be key