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Prepared for the Department of State Development on behalf of the Equipment Energy Efficiency Committee

Street light asset value determinations in the NEM and WEM

JULY 2014REVISED ADVICE

Marsden Jacob AssociatesFinancial & Economic Consultants

ABN 66 663 324 657ACN 072 233 204

Internet: http://www.marsdenjacob.com.auE-mail: [email protected]

Melbourne office:Postal address: Level 3, 683 Burke Road, CamberwellVictoria 3124 AUSTRALIATelephone: +61 3 9882 1600Facsimile: +61 3 9882 1300

Brisbane office:Level 14, 127 Creek Street, BrisbaneQueensland, 4000 AUSTRALIATelephone: +61 7 3229 7701Facsimile: +61 7 3229 7944

Perth office:Level 1, 220 St Georges Terrace, Perth Western Australia, 6000 AUSTRALIATelephone: +61 8 9324 1785Facsimile: +61 8 9322 7936

Sydney office:Rod CarrTelephone: +61 418 765 393

Author: Lizzie O’Brien, Phil Pickering, Nadja [email protected]

Acknowledgements: Paul Brown of Ironbark, Graham Mawer of Next Energy.

This report has been prepared in accordance with the scope of services described in the contract or agreement between Marsden Jacob Associates Pty Ltd ACN 072 233 204 (MJA) and the Client. Any findings, conclusions or recommendations only apply to the aforementioned circumstances and no greater reliance should be assumed or drawn by the Client. Furthermore, the report has been prepared solely for use by the Client and Marsden Jacob Associates accepts no responsibility for its use by other parties.

Copyright © Marsden Jacob Associates Pty Ltd 2014

MARSDEN JACOB ASSOCIATES

DECLARATION OF ENGAGEMENT WITH AERPrior to commencing this consultancy for the Department of State Development (DSD) (previously Department for Manufacturing, Innovation, Trade Resources and Energy), Marsden Jacob had been engaged by the Australian Energy Regulator (AER) to provide modelling services and advice in relation to Alternative Control Services. The engagement with the AER is due to commence after mid-July 2014 and after completion of this engagement with DSD.

The engagement with AER relates to the following upcoming regulatory determinations: Ausgrid, Endeavour Energy, Essential Energy and ActewAGL (NSW/ACT electricity distribution) Energex, Ergon Energy, SA Power Networks (Qld/SA electricity distribution)

The advice that will be provided to AER involves advice with reference only to the current National Electricity Rules provisions, while this engagement for DSD relates to prior determinations and proposes possible amendments to the National Electricity Rules.

Due to the scope and the timing differences, Marsden Jacob does not consider the engagements represent a conflict of interest.

In the interest of full disclosure, Marsden Jacob sought approval from the AER prior to submitting a proposal for this consultancy and provided information on the upcoming AER engagement to DSD in our proposal.

With the support of the two agencies, we include the aforementioned paragraphs to ensure transparency to all stakeholders on Marsden Jacob’s involvement in the two engagements.

MARSDEN JACOB ASSOCIATES

TABLE OF CONTENTSPage

Executive summary.............................................................................1

1. Introduction..................................................................................6

2. National Electricity Rules...............................................................92.1 AER classification...............................................................................................102.2 Prior determinations and changing existing classifications...............................142.3 Frameworks and Approach paper......................................................................152.4 AER Guidelines..................................................................................................152.5 Company policy.................................................................................................15

3. Key issues for street lighting in the NEM......................................173.1 National Electricity Rules...................................................................................173.2 Competition issues............................................................................................213.3 Residual asset values........................................................................................253.4 Financing non-standard assets..........................................................................303.5 Information availability......................................................................................32

4. Western Australia and Northern Territory.....................................354.1 Western Australia..............................................................................................354.2 Northern Territory..............................................................................................39

Appendix 1: Draft Rule Change Proposal............................................42

Appendix 2: Factors which facilitate the uptake of efficient street lights48

Appendix 3: Upcoming regulatory determination processes................50

Executive summaryIn Australia, street lighting services are predominately provided by distribution businesses which own and operate electricity networks. The economic regulatory frameworks that apply to electricity distribution services do not, in and of themselves, limit the potential uptake of energy efficient street lights. However, prior research has indicated that pricing, the policies of the distribution businesses, and the failure of competition to emerge in providing this service are evidence of ‘market failures’ which pose limitations on the feasibility of replacing existing street lighting assets with more energy efficient technologies.

Marsden Jacob Associates (Marsden Jacob) has been engaged by the Department of State Development (DSD) (previously Department for Manufacturing, Innovation, Trade Resources and Energy) on behalf of the Equipment Energy Efficiency Committee to examine a number of related street lighting issues. Specifically, processes used to establish street light asset values in the National Electricity Market (NEM) and Western Australia, wider issues related to the regulation of the assets and the market for street lighting services, and possible amendments to the Rules which may be required to effectively facilitate customer choice in this area.

Price regulation for street lighting servicesNeither the National Electricity Rules (the Rules) which apply in the NEM and the Northern Territory on an elective basis, nor the Electricity Access Code (the Code) which applies to the South West Interconnected System in Western Australia, address pricing matters related specifically to street lighting. Rather, the Rules and the Code apply to a range of services which include street lighting.

Although price controls1 within the Rules are specified at a high level for categories of services, discretion in how specified controls are applied is afforded to the AER. Similarly, the Code in Western Australia is drafted at a general service level with regulatory controls being distinguished only between two high level service categories.2

Within the NEM, the regulatory pricing controls selected by the AER are dependent on the classification of distribution service. The type of pricing control will have a direct influence on the transparency and accessibility of pricing information from a customer perspective.

Street lighting services are classified as alternative control services in Victoria, New South Wales, Queensland, Tasmania, and the Northern Territory. Classification is based on a number of competition principles outlined in the National Electricity Law and the Rules. An alternative control service is potentially a contestable service where costs are able to be allocated to customers based on service requests3. The service is regulated on the basis that insufficient levels of competition have arisen in the market to allow for lighter or no regulatory control.

1 ‘Control mechanisms’ or price controls are listed in clause 6.2.5(b) of the National Electricity Rules. They include a schedule of fixed prices; caps on the prices of individual services; caps on the revenue to be derived from a particular combination of services; tariff basket price control; revenue yield control; or a combinations or the aforementioned controls.

2 However, under the Code the ERA has an approval function rather than actively making the final determination as is the case for AER determinations. As such, the ERA has less discretion to determine the specifics of pricing as so long as proposal put forward by the regulated network is consistent with the Code.

3 This differs from standard control services where the costs are shared between customers and the service is optimally provided on a natural monopoly basis.

Department of Manufacturing, Innovation, Trade, Resources and EnergyAdvice on street lighting asset value determination in the NEM and WEM

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For alternative control services, the AER must determine the appropriate control from a list of controls including: a schedule of fixed prices; caps on the prices of individual services; caps on the revenue to be derived from a particular combination of services; tariff basket price control; revenue yield control; or a combinations or the aforementioned controls4.

The decision as to which control is selected is made with reference to a number of explicit factors listed in clause 6.2.5(d) of the Rules and to ensure the final determination is consistent with the National Electricity Objective5.

Factors which, by virtue of clause 6.2.5(d), need to be explicitly considered by the AER in its determination include competition issues, administrative costs, previous regulatory arrangements and consistency of approach, and any other factor considered relevant.

Rule change proposalAs some stakeholders have suggested that the current pricing arrangements are constraining the economically efficient replacement of street lighting assets, Marsden Jacob investigated a Rule change which sought to insert an additional factor into clause 6.2.5(d) of the Rules. The Rule change would seek to ensure the AER gives explicit consideration to the possible impact of control mechanisms on economically efficient investment in, and economically efficient use of, street lighting services by customers.

Preliminary consultation with a number of stakeholders suggested that if the drafting of the amendment closely replicated the National Electricity Objective, the amendment may not be necessary as the AER must already give consideration to the NEO in making determinations. Further feedback suggested that 6.2.5(d) was interpreted narrowly by the regulators to mean that they must have regard to the specified factors only in selecting the type of price control mechanism, and were not required to explicitly consider the factors further when addressing the detailed application of the selected price control, except to the extent they are implied by the NEO.

As most of the pricing issues raised by stakeholders are at a level of detail that falls below the level at which the Rules usually operate, direct input via well-argued submissions to the AER during the regulatory determination processes is likely to be the most effective means of modifying regulated pricing outcomes that relate specifically to street lighting.

In addition to individual submissions, a Rule change could also be contemplated that addresses the issues raised by stakeholders during preliminary consultation, although the likelihood of having the change approved is unclear. The proposed Rule change would insert an additional factor to be considered by the AER so that potential financial constraints are explicitly considered not only in the selection, but also in the application, of regulatory price controls. A draft Rule change proposal has been included in Appendix 1 which Marsden Jacob considers offers the best chance of successfully amending the Rules to facilitate street light pricing issues.

The classification and the regulatory pricing controls which apply to services are reviewed every five years as part of the regulatory determination process. At that point, the AER may consider a number of competition based principles listed in the NEL, and specific factors 4 Clause 6.2.5(b) of the National Electricity Rules5 The National Electricity Objective is outlined in the NEL. It is to “promote efficient investment in, and efficient

operation and use of, electricity services for the long term interests of consumers of electricity with respect to –

(a) price, quality, safety, reliability and security of supply of electricity; and

(b) the reliability, safety and security of the national electricity system.”


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outlined in the Rules in making a determination for the new regulatory period. Therefore, if the Rule change were to be effective, it would be considered as part of the next round of determination processes after acceptance. Appendix 3 details key dates and consultation timelines for upcoming regulatory determination processes in the NEM.

Negotiated and unregulated servicesSouth Australia and the Australian Capital Territory represent the anomalies in the treatment of street lighting services under the Rules. In South Australia, street lighting services are classified as a negotiated service on the basis that the major customers (local councils and Roads ACT) have sufficient bargaining power to negotiate the service provision under a ‘lightly’ regulated framework where the AER agrees the framework and is available on to arbitrate negotiations. A discussion on the adequacy of light handed regulation was provided in the final Essential Services Commission of South Australia determination prior to the AER assuming responsibility for regulatory oversight of the South Australian electricity networks. The AER considered the submissions to that consultation and the arguments in its determination to continue the treatment.

In the Australian Capital Territory, street lights are owned and operated by Roads ACT on a non-contestable basis. As such, AER regulatory oversight is not applicable and the service is considered ‘unclassified’ or ‘unregulated’ within the regulatory framework.

Other issuesMarsden Jacob considered a number of additional issues in relation to street lighting and the conclusions from this report are summarised below.

Competition: For street lighting and other ‘alternative control services’, the AER must have regard to the potential for development of competition in the relevant market and how pricing controls might influence that potential. Marsden Jacob found no evidence that pricing determinations were inappropriately affecting the level of competition in the market. However, effective competition for this service has not emerged even though the opportunity has existed for over a decade.

Competition in the market appears to be strongly affected by safety concerns, which serve to limit access to infrastructure and therefore limit the range of feasible options for customers to those provided by distribution businesses. Technical concerns around the potential for third party access to undermine the security and reliability of the remainder of the electricity network and understanding of the failure rates and consequential maintenance schedules for new technologies are also potential non-pricing barriers. Marsden Jacob considers the impact of safety and technical risks on feasible levels of competition in the market for street lighting warrants further consultation and analysis.

Charges for residual asset values: If a customer requests that a street lighting asset be retired early, the AER has determined that distribution businesses can charge customers for the residual value of that asset. In concept, we consider the appropriateness of charging for the residual value of street lighting assets and their method of calculation by the AER to be sound. However, confirmation of the detailed application of the calculation on a case-by-case basis is not possible based on the level of information published by the AER.


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Upfront payment of residual values: The AER has previously ruled that residual values should be charged as a single upfront payment. Charging the residual value upfront may impede the replacement of existing assets with economically efficient alternatives if the street lighting customer is capital constrained. The Rule change proposed for clause 6.2.5(d) seeks to have the AER explicitly consider potential financial constraints faced by users and whether the control mechanism inhibits the most economically efficient outcome for users in selecting the price control mechanism applied to these services and the form of application. Regardless of the proposed Rule change, Marsden Jacob recommends that stakeholders concerned about the potential financial constraints faced by street lighting customers request the AER reconsider the decision to require upfront payment during future determination processes.

Non-standard assets: If the installation of energy efficient assets that are currently considered ‘non-standard’ by a distribution business (and therefore not priced under the regulatory determination process) are considered by government to be in the public interest, modifications to the Australian Standards relating to road lighting (AS/NZS 1158 series) or the introduction of a Minimum Energy Performance Standard (MEP) through a ‘GEMS Determination’6 could be investigated as a means to overcome any inertia on the part of the distribution businesses in adopting new technology. Marsden Jacob notes that these instruments are most effectively used to remove the most inefficient technologies rather than facilitating changes on the efficient end of the technology spectrum. While these tools would be effective in overcoming any inertia the appropriateness of these tools with regards to overall street lighting objectives would need to be further investigated.

Where financial constraints are limiting customer selection of efficient ‘non-standard’ assets, this issue can be raised in submissions to the AER as part of the determination processes. Marsden Jacob recommends proposing that customers requesting a ‘non–standard’ street lighting asset should pay only the incremental cost difference between a standard and non–standard asset upfront, with the remainder recovered through standard ongoing charges. This approach is already applied in Queensland.

Information availability: Based on an initial review, the billing information provided to some councils may not adequately allow those customers to calculate the savings from replacing an existing street lighting service. Further investigation of the manner in which street lighting charges are presented to customers would be warranted.

In addition, given the complexity of the regulatory and billing processes for street lights, it is likely that some customers lack the necessary expertise to identify the costs and benefits associated with replacing existing street lighting assets with energy efficient alternatives. State government agencies could assist by providing councils with better information regarding the financial case for adopting energy efficient technologies. The Municipal Association of Victoria and the Southern Sydney Regional Organisation of Councils are two examples of organisations that have developed programs to overcome information and administrative barriers in street lighting. Feedback on these programs indicates that they have greatly assisted councils to effectively roll-out efficient street lighting and in facilitating negotiations with distribution businesses. In each case, independent consultants have been engaged to facilitate and administer the program on behalf of the funding organisation and councils.

6 ‘GEMS Determinations’ are made under the Greenhouse and Energy Minimum Standards (GEMS) Act 2012 which commenced on 1 October 2012. This national legislation replaces overlapping state and territory legislation on product energy efficiency.


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Western Australia: The methodology used to determine asset values and regulate the street lighting services under the Western Australian Electricity Access Code appear to be generally sound. However, this consultancy did not investigate the detailed application of the Code. In light of averaging techniques used to simplify the regulation, further investigation into the translation of the Code into specific customer prices may be warranted, although further consultation would be required to establish any specific concerns.

Northern Territory: As the Utilities Commission currently elects to make its determination in a manner which is consistent with the AER’s determinations and the applicable sections of the Rules, the consultation relevant to the NEM in this report is potentially also relevant to the Northern Territory.

Unbundling of service charges to improve customer transparency and cost reflectivity for street lighting services are now features of the market (from 1 January 2014 and 1 July 2014 respectively) and as such, more active customer participation in the market based on true costs and contestability of service provision is likely to be facilitated going forward.


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1. IntroductionMarsden Jacob Associates (Marsden Jacob) has been engaged by the Department of State Development (DSD) (previously the Department for Manufacturing, Innovation, Trade Resources and Energy) on behalf of the Equipment Energy Efficiency Committee to provide advice on the processes used to establish street light asset value in the National Electricity Market (NEM) and Western Australia. In addition Marsden Jacob was asked to consider wider issues related to the regulation of the assets and the market for street lighting services, and investigate possible amendments to the National Electricity Rules (the Rules) which may be required. Following this advice, DSD has also engaged Marsden Jacob to prepare a Rule Change Proposal on the proposed amendments.

Current situation

In most jurisdictions,7 electricity distribution businesses own unmetered street lighting assets and provide the services associated with the installation, maintenance and replacement of these assets. Local councils are the main customers for these services and therefore responsible for the costs associated with street lighting services. State governments are also responsible for some street lighting services, such as main roads.

Where street lighting services are undertaken by electricity distribution businesses, customer charges are regulated. The Australian Energy Regulator (AER) regulates services provided in the NEM by distribution businesses, the Economic Regulation Authority (ERA) is the regulator for the South West Interconnected System (SWIS) in Western Australia, and the Utilities Commission is the regulator in the Northern Territory.

The Rules govern the regulation of services by distribution businesses in the NEM and are applicable in the Northern Territory on an elective basis.8 The Rules are drafted to apply to a range of services and as such street light services are not directly referenced.9 The power for the AER (or the Utilities Commission) to regulate street lighting services under the Rules is a function of these services being provided as ‘distribution services’ from participants which are registered under the Rules as Network Service Providers. Where a street light service provider is not a distribution business regulated under the Rules, the service provision is not regulated within the NEL framework.

In Western Australia, the Electricity Access Code sets out provisions for the ERA to regulate networks which have been declared by the Minister. The SWIS is a declared network and hence street light services provided by the electricity network operator, Western Power, are regulated by the ERA. The other network in the State, the North West Interconnected System, has not been declared and as such the street lighting services provided by Horizon Power are not

7 Australian Capital Territory is the exception where Roads ACT owns all public street lighting assets.8 The Electricity Networks (Third Party Access) Code in the Northern Territory affords the Utilities Commission

discretion in determining the regulatory process for periods after the initial period. In the most recent determination, they elected to, where possible, use the approach used by the AER and the application of the relevant parts of the Rules.

See: Utilities Commission (undated) 2014 Network Price Determination webpage, accessed 17 June 2014, http://www.utilicom.nt.gov.au/AboutTheCommission/consultations/2014/Pages/default.aspx

9 The exception to this is a transitionary clause which requires the AER to classify lighting services as an alternative control service in NSW for the first distribution determination after the responsibility for regulation was transferred to the AER from the jurisdictional regulatory, IPART. See chapter 11, clause 6.2.3B(b) of the National Electricity Rules.


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regulated by the ERA. Further, street light services provided by other companies would not currently be regulated by the ERA.

Within the Western Australian Electricity Access Code, the pricing of street lighting is provided for directly only in relation to connections to the Western Power network. The remainder of the Code is drafted to apply to a range of services which are classified as either reference or non-reference services. Western Power is obligated to provide at least one tariff for each reference service and the definition for reference services, whilst not specifying a particular service, is drafted in terms of customer needs such that street lighting is provided as a reference service.

Provision of street lighting services are contestable throughout Australia with the exception of the ACT where Roads ACT owns and maintains the street lights. However the factors such as the economically optimal use of existing electricity poles and the need to access this infrastructure in a manner which meets safety standards and does not jeopardise the integrity of the remainder of the electricity network services are fundamental concerns which limit the practical contestability of the service. Clarity around access to infrastructure and safety concerns are beyond the current economic regulatory framework, however, these considerations do serve to restrict the range of service providers and the types of lighting which are economically efficient from a customer viewpoint. 10 As such, street lighting services continue to be provided primarily by distribution businesses and regulated from a price perspective by jurisdictional regulators.

Prior investigations

The Council of Australian Governments (COAG) National Strategy on Energy Efficiency includes a measure to improve the energy efficient of streetlights. South Australia, which was tasked with the responsibility for leading this measure, has previously conducted an investigation in the market barriers to the installation of energy efficient streetlights.

PricewaterhouseCoopers (PwC) 2011 Report into the Barriers to Energy Efficient Street Lighting canvassed a number of issues with the current regulatory framework and potential barriers (in the form of misaligned incentives as well as regulatory barriers) which are currently posing issues for the progression of COAG’s measure.

A draft national Streetlight Energy Efficiency Strategy, which was developed in consultation with stakeholders has also been published. This draft strategy also sheds light on the range of regulatory arrangements and the issues currently being faced which inhibit the roll-out of energy efficient street lighting.

In prior research, pricing, the conduct of the distribution businesses in addressing consumer needs which result in economically efficient outcomes for the whole community, and the lack of competition in the industry have also been raised as potential limitations in relation to replacing existing street lighting assets with more energy efficient technologies.

Scope of current study

Building on the previous investigations, the advice provided by Marsden Jacob covers the following:

10 Making use of existing distribution network infrastructure is commonly the economically efficient outcome for street lighting. Where access to the infrastructure is restricted on safety grounds, the range of options which are economically sensible is restricted to the services and conditions offered by the relevant distribution network business. While the price of these services is regulated by the AER, the ability to specify a range of service including different lighting technologies falls outside of the economic regulation framework.


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an outline of the processes used by the AER to establish street light asset value determinations (e.g. the residual value or Written Down Value (WDV)) and an assessment as to whether the process fairly represents the written down value of street lights that are retired early;

findings on the potential for a Rule Change Proposal for the NEM which would facilitate the uptake of energy efficient lighting and responses from a preliminary consultation on a Rule change identified;

examination of and recommendations regarding several additional issues identified through this engagement and previous studies including competition issues, financing issues and information availability; and

a brief overview of the Western Australian and Northern Territory regulatory treatment of street lighting assets.

The advice also included the drafting for the Rule Change proposal.

Structure of this report

The remaining sections of this report are structured as follows:

Section 2 provides an outline of the regulatory framework in the NEM;

Section 3 outlines key issues and recommendations identified through this research; and

Section 4 provides a brief overview of the Western Australian and Northern Territory regulatory frameworks for street lighting.

Appendix 1 contains drafting for a potential Rule Change proposal.

Appendix 2 provides a summary of a number of aspects of the current street lighting market which have facilitated the roll-out of efficient street lights.

Appendix 3 details key dates and consultation timelines for upcoming regulatory determination processes in the NEM.


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2.National Electricity RulesIn the NEM, the NEL and the Rules provide a legislative framework for provision and consumption of electricity services. The Rules, which are made under the NEL and have the power of the law, set out of the day-to-day operation of the electricity market and the economic regulation of services provided by registered participants in the market. The NEL also sets out the powers and functions of the Australian Energy Regulator (AER) as the economic regulator for electricity services.

The regulation of street lighting services by the AER is a function of the provision of these services by distribution businesses. In order for distribution businesses to own, operate, or control distribution systems11 they must, unless exempted by the AER, register with the Australian Energy Market Operator as a Network Service Provider.12 As a Network Service Provider, distribution businesses are subject to the Rules including economic regulation by the AER. Importantly, where street light services are provided by entities which are not Network Service Providers the AER does not have a role in regulation of the service.

The provision of street light services by distribution businesses (or any other provider) is not mandated within the NEL framework and the Rules are drafted in a way which enables them to apply to a range of services. As such, street lighting services are not directly referenced in the Rules. The only exception is a transitional provision for New South Wales which was applicable for the first regulatory determination period after economic regulatory oversight transferred from IPART to the AER.13

The regulation of street lighting services by the AER as a ‘distribution service’ has recently been the subject of a Federal Court case.14 Ergon, the Queensland regional distribution company, argued that street lighting services did not fall with the Rules definition of ‘distribution services’ and therefore the AER did not have power to regulate the service. The judge found in favour of the AER that street lighting services did fall within the definition of ‘distribution services’ within the Rules. The case serves to highlight the AER’s role as the regulator as limited to where these services are provided by a Network Service Provider as a distribution service. Importantly, the requirement for distribution businesses to provide street lighting services is a function of historical distribution businesses decisions or is a requirement of jurisdictional legislation.

Where the Rules are applicable, the AER has power to classify various services or groups of services. The classification then limits the range of regulatory pricing controls (control mechanisms) which the AER may use to regulate the economic provision of the service.

Classification and regulatory control is, in the first instance, a function of the historical treatment of the assets by jurisdictions - several clauses in the Rules restrict the AER from deviating the regulatory treatment from the prior determination unless there exists a compelling

11 Distribution systems are defined in Chapter 10 of the Rules. A distribution system is a distribution network, together with the connection assets associated with the distribution network, which is connected to another transmission or distribution system.

12 Clause 2.5.1(a) of the National Electricity Rules.13 Chapter 11, clause 6.2.3B(b) of the National Electricity Rules.14 Ergon Energy Corp Ltd v Australian Energy Regulatory [2010] FCA 393, 18 April 2012


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reason for change.15 However, at the beginning of each new regulatory control period the AER revisits both the classification and form of control which applies to each service.

This section covers the classification process including the factors which must be specifically considered by the AER in classifying services, the framework provided by the Rules in selection of the price control is also covered. AER guidelines and distribution business policy which provide further specification beyond the Rules are also covered.

2.1 AER classificationThe classification of distribution services and the form of regulation that will be applied to each classification is largely at the discretion of the AER, with requirements for consideration of specific factors identified in the NEL and the Rules.

The classification and the regulatory pricing controls which apply to services are reviewed every five years as part of the regulatory determination process. At the beginning of each new regulatory determination process, the AER considers existing regulatory treatment16 and appropriate regulatory controls with reference to a number of competition based principles listed in the NEL, and specific factors outlined in the Rules.

The AER makes determinations after consideration of these factors via a three step process. Each step and the relevant NEL and Rules references are:

Step 1: Classification of a distribution service as either direct control, negotiated service or unclassified service. This classification is made with reference to section 2F of the NEL and clauses 6.2.1(c), 6.2.1(d) and 6.2.2(d) of the Rules.

Step 2: Direct control services are further classified as either standard control or alternative control services. The AER determines the further classification with reference to six factors outlined in clause 6.2.2(c) and consideration of previous determinations in accordance with clause 6.2.2(d) of the Rules.

Step 3: The appropriate form of regulation is made with reference to the forms of control listed in clauses 6.5.2(a) and with consideration of factors outlined in clause 6.5.2(c) for standard control services and clause 6.5.2(d) for alternative control services of the Rules.

Each of these steps is described in turn below.

The various categories of distribution services and the regulatory treatment are summarised at a high level in Figure 1.

15 Clauses 6.2.1(d) and 6.2.2(d) of the National Electricity Rules.16 Clauses 6.2.1(d) and 6.2.2(d) of the National Electricity Rules restrict the AER from deviating the regulatory

treatment of services from the prior determination unless there exist compelling reasons for change.


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Figure 1: Classification of distribution services

Classification Description Regulatory treatment

Direct control service

Standard control service

Services that are central to electricity supply and therefore relied on by most (if not all) customers such as building and maintaining the shared distribution network.

The AER regulate these services by determining prices or an overall cap on the amount of revenue that may be earned for all standard control services.The costs associated with these services are shared by all customers via their regular electricity bill.

Alternative control service

Customer specific or customer requested services. These services may have potential for provision on a competitive basis rather than by the local distributor.

The AER sets service specific prices to enable the distributor to recover the full cost of each service from customers using that service.

Negotiated service Services the AER considers require less prescriptive regulatory approach because all relevant parties have sufficient market power to negotiate the provision of those services.

Distributors and customers are able to negotiate prices according to a framework established by the rules. The AER is available to arbitrate if necessary.

Unclassified service Services that are not distribution services or services that are contestable.

The AER does not have a role in regulating these services.

Source: AER

Step 1 – Direct control, negotiated or unclassified (unregulated) service

In the first instance, distribution services are classified as either direct control, negotiated or unclassified services.

In classifying distribution services, the AER must consider factors outlined in the NEL and the Rules. For the classification of services as either direct control or negotiated services the AER must have regard to the four factors in 6.2.1(c) of the Rules:

1. the form of regulation factors in section 2F of the NEL:

the presence and extent of any barriers to entry in a market for electricity network services

the presence and extent of any network externalities (that is, interdependencies) between an electricity network service provided by a network service provider and any other electricity network service provided by the network service provider

the presence and extent of any network externalities (that is, interdependencies) between an electricity network service provided by a network service provider and any other service provided by the network service provider in any other market


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the extent to which any market power possessed by a network service provider is, or is likely to be, mitigated by any countervailing market power possessed by a network service user or prospective network service user

the presence and extent of any substitute, and the elasticity of demand, in a market for an electricity network service in which a network service provider provides that service

the presence and extent of any substitute for, and the elasticity of demand in a market for, elasticity or gas (as the case may be)

the extent to which there is information available to a prospective network service user or network service user, and whether that information is adequate, to enable the prospective network service user or network service user to negotiate on an informed basis with a network service provider for the provision of an electricity network service to them by the network service provider.

2. the form of regulation (if any) previously applicable to the relevant service or services, and, in particular, any previous classification under the present system of classification or under the present regulatory system (as the case requires)

3. the desirability of consistency in the form of regulation for similar services (both within and beyond the relevant jurisdiction)

4. any other relevant factor.

In classifying services that have previously been subject to regulation under the present or earlier legislation the AER must also have regard to clause 6.2.1(d) of the Rules. This clause serves to require the AER to retain any prior classification unless an alternative classification is clearly more appropriate. The same restriction also applies to determinations in the second classification step where direct control services are classified as either standard control or alternative control (6.2.2(d)).

Street lighting services have been classified by the AER as direct control services in Victoria, New South Wales, Queensland and Tasmania. They have been classified by the AER as negotiated services in South Australia and are unclassified (and therefore not subject to regulatory control by the AER) in the Australian Capital Territory.

Classification of street lighting as a direct control service reflects the AER’s consideration that insufficient competition currently exists in the market for these services and therefore regulatory oversight is needed. As is explained in the second step of the classification process, where contestability could potentially develop for a service, the regulatory treatment is specifically separated from other general network services. This is because in general network services contestability is not considered preferable given the natural monopoly characteristics of investment.

In the case of South Australia, where street lighting has been classified as a negotiated service, the classification is a result of historical treatment by the Essential Service Commission of South Australia (ESCOSA). This historical treatment was not revised by the AER as it did not consider that an alternative approach is clearly more appropriate.17 ESCOSA had previously considered there was “minimal scope for effective competition” in the provision of standard street lighting services, however, local councils (represented by the Local Government Association of SA) and Transport SA indicated a preference for these service to continue to be 17 AER (November 2008) Final Frameworks and Approach Paper – ETSA Utilities 2010 to 2015, p. viii


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regulated separately from other distribution services. Specifically, they submitted to ESCOSA that local councils and Transport SA had sufficient bargaining power for negotiation to deliver a competitive outcome for the provision of lighting services.18

Direct control services are subsequently categorised as either standard control or alternative control in a second step (described below).

Step 2 - Standard control service or alternative control service (applies to direct control only)

Services that have been classified as a direct control service are further categorised as either standard control or alternative control services.

Street lighting services have been classified as direct control services and further, as alternative control services, in Victoria, New South Wales, Queensland, and Tasmania. Reasons for classifying street lighting as an alternative control service have focused on the ability for these services to be provided by third party service providers or contestability to develop in the market and the ability of costs to be reflectively passed through to individual customers.

Once a service has been classified as an alternative control service the arrangements for provision of the service are ring-fenced and regulated separately from other monopoly services (standard control services). The separation of the services reflects a number of considerations including the potential for a contestable market to develop, and the ability to identify the customer and therefore apply appropriate direct pricing signals.

The specific NER requirements which the AER must have regard to in undertaking classification of direct control services as either standard control services or alternative control services are outlined in clause 6.2.2(c):

1. the potential for development of competition in the relevant market and how the classification might influence that potential

2. the possible effects of the classification on administrative costs of the AER, the DNSP and users or potential users

3. the regulatory approach (if any) applicable to the relevant service immediately before the commencement of the distribution determination for which the classification is made

4. the desirability of a consistent regulatory approach to similar services (both within and beyond the relevant jurisdiction)

5. the extent that costs of providing the relevant service are directly attributable to the customer to whom the service is provided, and

6. any other relevant factor.

Classification of direct control services must also consider if the service has previously been subject to regulation under the present or earlier legislation (6.2.2(d)).

18 Ibid, p.27


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Step 3 - Appropriate form of regulation (applies to standard control and alternative control only)

For direct control services, controls over the prices, the revenue to be derived from the service or a combination of both price and revenue control can be applied. The potential control mechanisms are specified in clause 6.2.5(b) of the Rules:

a schedule of fixed prices;

caps on the prices of individual services

caps on the revenue to be derived from a particular combination of services;

tariff basket price control;

revenue yield control; or

a combination of the above.

For street lighting, the AER has used a combination of these controls including using several controls across different time periods (dependent on age of asset information) and within jurisdictions.

Clause 6.2.5(d) of the Rules sets out the factors the AER must have regard to when determining the form of control to apply for alternative control services. These include: potential for competition to develop in the market, possible effects on administration costs, regulatory arrangements applicable prior to the immediate determination, desirability for consistency of regulatory arrangements between similar services, and any other relevant factor.

2.2 Prior determinations and changing existing classifications

In classifying services that have previously been subject to regulation under the present or earlier legislation, the AER must have regard to clause 6.2.1(d) (direct control or negotiated control categorisation) and 6.2.2(d) (standard control or alternative control categorisation for direct control services) of the Rules. Specifically, the AER must act on the basis that, unless a different classification is clearly more appropriate:

there should be no departure from a previous classification (if the services have been previously classified), or

if there has been no previous classification, the classification should be consistent with the previously applicable regulatory approach.

Consideration of previous regulatory decisions have been influential in the initial decisions made by the AER following the transfer assignment of regulatory oversight to the AER from jurisdictional based regulators. In the Framework and Approach paper for Queensland and South Australia, the AER noted that it had previously adopted a “cautious approach, typically not departing from the State regulators' positions in order to minimise the extent of change where possible (even where we had discretion to do so)”.19

19 AER (September 2013) Framework and Approach paper for Queensland and South Australia, p. 5


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2.3 Frameworks and Approach paperIn anticipation of each distribution determination, the AER is required to publish a Frameworks and Approach paper (clause 6.8.1 of the Rules). It is within this paper and through the associated consultation on the paper that the AER must signal20 the likely approach to (and reasons for that approach) to the classification of distribution services and the form of regulation that should be applied.

While the AER has discretion to depart from the likely classifications signalled in the Framework and Approach paper as part of the regulatory determination process, this has not occurred in relation to street lighting services. As such, the majority of debate over the classification occurs through this initial process. Debate over the form of regulation has been raised through the formal determination process by distribution businesses, however, it is most commonly the specifics of the financial models that are considered after the publication of a final Framework and Approach paper by the AER.

Appendix 3 details key dates and consultation timelines for upcoming regulatory determination processes in the NEM.

2.4 AER GuidelinesThe AER may also produce guidelines, which are not mandatory (and so do not bind the AER or anyone else) but, if the AER makes a distribution determination that is not in accordance with the guideline, the AER must state in its reasons for the distribution determination, the reasons for departing from the guideline (clause 6.2.8(c)).

Any relevant guideline may be published, but the AER is required as a minimum to make and publish Shared Asset Guidelines, the Capital Expenditure Incentive Guidelines, the Rate of Return Guidelines, the Expenditure Forecast Assessment Guidelines, the Distribution Confidentiality Guidelines and the Cost Allocation Guidelines in accordance with the Rules (clause 6.2.8(a)).

2.5 Company policyWhere the Rules and AER distribution determination allow a level of discretion in the form that price or financing terms are offered (by virtue of the tariff structure) and the range of services offered, business decisions by individual distribution companies will influence the final market outcomes.

Based on our research Marden Jacob concluded that the economic regulatory framework and AER’s powers do not extend to:

determining the specific types of street lighting services offered including the specific technology (beyond approving the cost/ price if requested);

the additional financing arrangements that might be extended to customers over and above the standard regulated prices; or

20 The Framework and Approach paper sets out only the ‘likely’ approach to regulation as the AER may determine to change this through the regulation proposal and determination processes. In the proposal stage, DNSPs may also propose alternative forms of regulation and provide information and reasoning to effect their proposal. Historically, the AER has tended to retain the categorisation and general form of regulation signalled in the Frameworks paper.


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the specific terms and conditions under which services are provided.

Decisions by individual distribution businesses to provide specific street lighting services and the conditions under which these services are offered is evident through:

proposals to the AER on which standard services to be regulated;

final standard tariff offerings (based on AER determinations);

commercial tariffs for non-standard service offerings; and

company policy on street lighting (where these exist).

Energy efficient street lighting options are currently available but in many jurisdictions, these do not form part of the standard service offering. Rather these options are provided as ‘negotiated services’ and subject to minimal AER oversight. As such, offers to provide these services are left largely to the discretion of the distribution business.


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3.Key issues for street lighting in the NEM

This section outlines our analysis and recommendations regarding a number of potential impediments to the economic replacement of existing street lighting assets with more energy efficient alternatives.

Our analysis has specifically examined:

1) the National Electricity Rules;

2) competition for the supply of street lighting assets;

3) charges for residual asset values;

4) financing of non-standard assets; and

5) information availability.

An investigation of the potential for an amendment to the Rules to would facilitate the uptake of efficient street lights was also conducted and the findings are presented in Section 3.1.

3.1 National Electricity RulesIn most jurisdictions, the public lighting services are provided by distribution businesses. As such, the services are regulated by the AER through the regulatory determination process.

As set out in section 2.1, the AER has classified public lighting in different jurisdictions as either a direct control service, and more specifically an alternative control services, or a negotiated service. If classified as a negotiated service, the AER does not prescribe regulatory controls over pricing or the specific conditions of service provision but rather sets the negotiating framework under which customers and distribution businesses can negotiate prices and provides arbitration in the case that negotiation stalled.

If classified as direct control service, the AER will impose controls over prices through a distribution determination, as outlined in clause 6.2.5 of the Rules:

(a) A distribution determination is to impose controls over the prices of direct control services, the revenue to be derived from direct control services or both.

(b) The control mechanism may consist of:

(1) a schedule of fixed prices;

(2) caps on the prices of individual services;

(3) caps on the revenue to be derived from a particular combination of services;

(4) tariff basket price control;

(5) revenue yield control; or

(6) a combination of any of the above.

In deciding on a control mechanism for alternative control services (the basis of which must be stated in the determination), the AER must have regard to a number specific factors outlined in clause 6.2.5(d) of the Rules. These are:


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(1) the potential for development of competition in the relevant market and how the control mechanism might influence that potential; and

(2) the possible effects of the control mechanism on administrative costs of the AER, the Distribution Network Service Provider and users or potential users; and

(3) the regulatory arrangements (if any) applicable to the relevant service immediately before the commencement of the distribution determination; and

(4) the desirability of consistency between regulatory arrangements for similar services (both within and beyond the relevant jurisdiction); and

(5) any other relevant factor.

The AER may also produce guidelines (see section 2.4), which are not mandatory (and so do not bind the AER or anyone else). However, if the AER makes a distribution determination that is not in accordance with the guideline, the AER must state, in its reasons for the distribution determination, the reasons for departing from the guideline.21 Any relevant guideline may be published, but the AER is required as a minimum to make and publish Shared Asset Guidelines, the Capital Expenditure Incentive Guidelines, the Rate of Return Guidelines, the Expenditure Forecast Assessment Guidelines, the Distribution Confidentiality Guidelines and the Cost Allocation Guidelines in accordance with the Rules.22

Opportunities to facilitate the uptake of economically efficient street lighting

Neither the Rules nor the guidelines are drafted at a level that contemplates specific services such as street lighting. As they may apply to a range of services, the Rules also do not specify a precise approach for imposing price controls. However, where street light services have been classified as alternative control services the Rules provide some guidance as to the factors which must be considered in determining the regulatory pricing control applied by the AER.

Currently, the AER must give express consideration to five factors listed in clause 6.2.5(d) when determining the regulatory pricing control. These are competition issues, administrative costs, previous regulatory arrangements and consistency of approach, and any other relevant factor. The Rules do not currently expressly require the AER to consider whether the form of price controls would result in price signals and cost impacts on consumers that promote the most economically efficient outcome for the whole community.

Price signals are an important aspect of economic regulation and provide behavioural incentives to both suppliers and customers. Many of the issues raised in previous reviews – and the subject of this consultancy – relate not only to competition issues (which are an issue the AER must consider) but also to whether regulated prices are an impediment to the economically efficient replacement of existing street lighting assets with energy efficient alternatives.

To that end, Marsden Jacob investigated a potential Rule change which would specifically require the AER to consider whether the control measures provide appropriate incentives for the most economically efficient outcome for the whole community. While some stakeholders may believe that ‘any other relevant factor’ provides sufficient scope for the AER to consider the efficiency of price signals to customers at the moment, the available evidence suggests that the most economically efficient community outcome may not be occurring and therefore may require the AER’s deliberate attention. Importantly, it would seem that customers of street

21 Chapter 6, 6.2.8(c) of the National Electricity Rules.22 Chapter 6, 6.2.8(a) of the National Electricity Rules.


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lighting services may not have the appropriate expertise or resources to provide effective input into the regulatory determination process and achieve outcomes which facilitate the most efficient community outcomes.

A Rule change will not guarantee that the AER will modify its decisions, as other factors (such as increased administrative costs or consistency with the previous regime) may be overriding considerations. However, in Marsden Jacob’s opinion adding the additional element included in the rule change it will at least require the regulator to give explicit consideration to the impact of prices on the whole of community outcomes and to deliberately evaluate the relevant arguments in its determination. A Rule change could also ensure that this consideration is relevant to both the selection of the regulatory price control and the manner in which the price control is applied.

Rule change process

Rule change proposals are assessed by the Australian Energy Market Commission (AEMC). The AEMC is responsible for making rules under the National Electricity Law (NEL), the National Gas Law and the National Energy Retail Law. The AEMC may also under take market reviews and provide advice to governments on matters within the legislative framework or on direction by the COAG.

Under the NEL, the AEMC must assess Rule change proposals against the National Electricity Objective (NEO) as set out in the NEL. The NEO is to “promote efficient investment in, and efficient operation and use of, electricity services for the long term interests of consumers of electricity with respect to –


(b) the reliability, safety and security of the national electricity system.”

Any Rule change proposal requires a very clear statement of the issues with the current Rules. The AEMC only has power to make changes within the context of the current Rules and therefore the problem, as well as the proposed solution, would be viewed within this context.

Further, Rule Amendments may only be made by the AEMC if it is clearly demonstrated (and the AEMC is satisfied) that the proposed changes will, or is likely to, contribute to the achievement of the NEO.

Prior to preliminary consultation, Marsden Jacob proposed a Rule Amendment that would seek to insert the following addition factor for the AER to consider into clause 6.2.5(d):

the impact of the control mechanism on economically efficient investment in and use of electricity services by customers.

The essence of the proposed Rule change was to make clear that the AER is to explicitly consider the matter as it directly affects practical achievement of the NEO.

Preliminary consultation on Rule change

Marsden Jacob discussed the concept of an amendment to clause 6.2.5(d) with a number of stakeholders and interested parties as part of a preliminary, informal consultation. Consultation consisted of telephone discussions and email exchange with the AER, the AEMC, several distribution networks, and local Council representatives.

The purpose of the consultation discussions was to test, in a general sense, stakeholder response to the amendment. Stakeholders were asked to consider an amendment 6.2.5(d) specifying the AER consider ‘the impact of the control mechanism on the economically efficient investment in


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and use of electricity services by customers’. They were then requested to consider whether the insertion of such a clause might be interpreted in a manner that would influence the pricing and tariff decisions inherent in the control mechanisms and therefore facilitate resolution of street lighting issues related to the lagged uptake of new (efficient) lighting technology.

A number of stakeholders commented that the additional clause would likely be “too general” to address specific street lighting issues.

Stakeholders also commented that the drafting appeared to restate the NEO, which is considered by the AER (and the Rules) without need for specific statement. A concern in this regard was also raised that if the wording too closely restated the NEO that aside from being an unnecessary insertion, there may be risk that the insertion prompts misinterpretation in suggesting that this was the only clause for which consideration of the NEO is required.

Staff from the AER and AEMC independently reflected that the clause functions to allow for the selection of control mechanisms from the list of options provided in 6.2.5(b) and therefore does not address the level of detail which may be intended in requesting the Rule amendment. Rather, the detailed implementation of the pricing control mechanism is undertaken through the regulatory determination process, where final discretion rests with the AER.

Further, it was clarified that the objective of the determination process is to achieve efficient outcomes for consumers by regulating the costs associated with services provided by monopoly distribution network businesses covered by the Rules.

AER staff stated “the power and functions of the NEL and NER only extend to specifying the high level types of controls that may be used by the AER in relation to any services provided by Distribution Network Service Providers. They do not go into the technical details of the service provision or the intricacies of access to necessarily associated network assets which might facilitate contestable provision of the services.” For clarity, non-economic regulation issues, such as the approvals required to affix lights to distributor owned poles and safety related matters, cannot be dealt with through the NEL or NER. The AER staff commented that these were policy matters for other agencies which must first be addressed to effect a change in public lighting provision.

The AER staff member’s comments are reflective of those also raised by other stakeholders. Without exception, stakeholders commented a view that non-pricing related barriers were more likely to be the substantial cause of any potential inefficient lagged uptake of efficient street lighting.

Subsequent considerations and amendments

A narrow interpretation of clause 6.2.5(d) would suggest that the clause only functions to specify that the regulatory price control must be selected from the list of control mechanisms stated in 6.2.5(b) and do not influence the detailed implementation of those price controls. Under this interpretation, once the control mechanism is selected the AER has discretion to consider any relevant issues – whether or not they appear in 6.2.5(d) – when determining whether pricing submissions are consistent with the NEO.

Following the preliminary consultation with stakeholders, Marsden Jacob considered that a further amendment would be required to ensure that potential financial constraints are be expressly considered not only in the selection of the control mechanism, but also in the application of the control mechanism.


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The proposed changes to 6.2.5(d) are underlined below:

In deciding on a control for alternative control services, and the manner in which that control is applied, the AER must have regard to:





(5) the potential financial constraints faced by users and whether the control mechanism inhibits the most economically efficient outcome for users; and


Conclusion

In imposing price controls for alternative control services such as public lighting, the AER must currently have regard to competition issues, administrative costs, previous regulatory arrangements and consistency of approach, but not specifically whether price controls promote the most economically efficient outcome for the community.

Marsden Jacob notes that the most effective and direct means to address specific pricing issues will be through active participation in the regulatory determination process. Should a Rule change also be pursued, we propose that the highest chance of success would be through an amendment to 6.2.5(d) which requires the AER to give explicit consideration to the possible impact of pricing controls on economically efficient investment in and use of public lighting services by customers.

3.2 Competition issuesSome stakeholders have suggested that a lack of competition may be constraining the uptake of energy efficient lighting. More competitive markets are typically credited with increasing the range of products, better meeting customer service requirements, increasing innovation and reducing prices to customers. Conversely, some markets are natural monopolies in which it is uneconomic to duplicate the service (for example, if there are significant economies of scale).

The AER’s classification of electricity distribution services and the subsequent regulation of those services must give consideration to a number of factors, including the competition principles set out in section 2F of the NEL. These principles include the presence and extent of any barriers to entry in the market, externalities, market power, substitutes, and the presence of adequate information to enable negotiation to occur on an informed basis.


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Based on these considerations, and having regard to the previous form of regulatory control (as required in clauses 6.2.1(d) and 6.2.2(d) of the Rules), the AER has established classifications for street lighting services in each jurisdiction:

Queensland, New South Wales, Victoria, Tasmania – alternative control service;

South Australia – negotiated service; and,

ACT – unclassified service (not regulated)23.

Street lighting assets in most jurisdictions (except ACT) are provided by electricity distribution businesses and can, under certain circumstances, also be provided by third parties. Installation, ownership and maintenance arrangements differ by jurisdiction, driven by previous state government regulatory and policy decisions, and individual distribution business decisions.

There are a number of reasons why the selection of more efficient new lighting technology may be constrained in cases where the distribution business is the main service provider. This includes where distribution businesses will only allow installation of lighting from a set list of accredited products (which does not include desired efficient lighting options). The justification given is that differing maintenance schedules and technology failure rates are untested or have not been approved by the regulator yet.

A second example is where the distribution business only provides maintenance services to assets which they own and/or which make use of specified standard materials. A third example is where access to the lights for maintenance is restricted for safety reasons which results in the effective customer choice being limited to the selection offer by the distribution business.

In understanding the competitive nature of the market for street lighting it is important to clarify where issues can be addressed within the economic regulatory framework. At the high level nature of the Rules does not preclude alternative combinations of installation, ownership and maintenance arrangements. However, the framework is limited to the economic regulation of electricity distribution businesses and so only cost treatment and price for services offered by these businesses can be controlled within the framework to facilitate competition.

The South Australian arrangements are the most flexible and lightly regulated. The flexibility has facilitated the availability of a standalone maintenance service tariff where the customer retains ownership of the asset. This service offering was previously required by ESCOSA and has been continued as part of the negotiating framework overseen by the AER. Nevertheless, some restrictions do apply to SA Power Networks offering of the maintenance only service. This includes that third party maintenance services are not possible where SA Power Network owned distribution infrastructure is used and third party installation and ownership is similarly not available where the distribution infrastructure is used.

In New South Wales, Victoria and Queensland, the service offerings are narrower as the distribution businesses limit the types of street lighting assets they will construct and maintain under regulated pricing to specific standard assets. Third parties are able to supply non-standard assets provided the relevant State technical and accreditation requirements are met. In New South Wales where safety requirements are independently set by the government, these assets may also be installed and maintained by a third party.

In Queensland, assets constructed by third parties or non-standard assets are gifted to the distribution business and may be subsequently maintained at a negotiated cost by the business. 23 Roads ACT currently owns the street lighting infrastructure as a non-contestable service in the ACT although

this may soon change. Provision of maintenance services provided by the distribution business is classified as an unregulated services due to the relative bargaining power of the relevant parties.


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The potential for competition in Queensland differs between the regional distribution area (covered by Ergon) and the metropolitan distribution area (covered by Energex).

In Victoria, assets which are constructed by a third party may be subsequently gifted and maintained by the distribution business. Contestability for the procurement of street lighting hardware is a function of the Victorian Public Lighting Code which is a condition of distribution licences and administered by the Essential Service Commission of Victoria. Two distribution businesses have also determined to allow contestability for the project management and installation works associated with the assets where the current installation is owned by the network business. The remaining three distribution business do not allow contestability for these services on the basis of safety and technical concerns. Gifting of some street lights back to the distribution business is required as a condition24 in some cases and as such the operation and maintenance is almost exclusively undertaken by these businesses. It is noted that, as for other jurisdictions, greenfield projects provide the exception to these circumstances where services are fully negotiated.

In the ACT, Roads ACT is not regulated by the AER or under the Rules and the asset costs do not form part of ActewAGL’s regulatory determination. As such, the street lighting assets fall outside of the usual regulatory and pricing control mechanisms, despite the fact that the maintenance is conducted by ActewAGL.

In Tasmania, the services were previously not regulated by the Office of the Tasmanian Economic Regulator (OTTER). However, unlike other jurisdictions, the ability for a third party to supply street lighting services appears limited. Aurora must provide authorisation for any third party services, but there are no plans for engagement and authorisation of third parties is not currently envisioned.25

While the regulatory regime allows for street lighting services to be supplied by third parties (other than ACT and Tasmania where uptake is not possible or highly unlikely) other barriers to competition may still exist. Pricing barriers and non-pricing barriers are discussed in turn below.

Pricing barriers

Under alternative control service regulation, street lighting pricing controls are determined by the AER. A cornerstone of economic regulation, including the approach adopted by the AER, is to protect customers from monopoly pricing, i.e. pricing above efficient cost. However, potential competitors may be prevented from entering the market if the incumbent’s price is below the competitive market rate, which may be possible due to economies of scope or scale. We note that if the incumbent’s services can be provided below competitors’ prices, there is a case to be made that the service is a natural monopoly and that competition would result in an inefficient outcome for the community. In our opinion, the AER is unlikely to contemplate any proposal in which the incumbent’s prices are artificially increased to encourage competition.

In South Australia, street lighting is regulated as a negotiated service which involves setting prices for elements of the negotiated service but not the total price. A potential competitor, Citelum Australia, suggested that pricing may be preventing competition in that State. However, the AER noted that the relevant matters were outside the scope of classification:

24 Gifting of asset back to the distribution business is required in Victoria and Queensland for the provision of maintenance services. Maintenance services cannot be performed by third parties where the distribution infrastructure assets are involved in these states. In Victoria this has been justified on safety grounds, where a ‘no go zone’ for workers which are not employed by the licensed electricity distribution company has been established by some distribution businesses.

25 AER (November 2010) Framework and approach paper Aurora Energy Pty Ltd, p. 29.


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Citelum Australia also supported the classification we proposed but submitted that SA Power Network's pricing of the service hinders competition. Citelum Australia's submission raised a number of structural issues around service contestability and pricing, including the allocation of risk between SA Power Networks and other parties. These matters are outside the scope of service classification. Rather, they relate to the negotiating distribution service criteria and negotiating framework, which support the negotiation process. We will consult on these in the context of our distribution determination.26

On 1 July 2012, the Queensland government introduced a Community Service Obligation (CSO) to cover alternative control services (including street lighting) provided by Ergon with the result that “currently, around 50 street light customers (mainly local councils) whose street lights are owned and operated by Ergon Energy pay for their electricity use but not the costs of constructing or maintaining the street lights they use. These costs are instead fully subsidised by the Queensland Government via the CSO”.27 The CSO available to Ergon Energy would make competition unfeasible. However, on 1 July 2014, the government will begin the process of rolling back this subsidy with councils facing an initial pass through of 10 per cent from this date and the recovery of the remaining 90 per cent to be subject to a price path over time.28

Non-pricing barriers

With the exception of ACT and Tasmania, street lighting customers can employ third party providers to construct street lighting assets. However, third party providers must adhere to all relevant legislative requirements and, if the asset is to be maintained by the distribution business, any technical engineering or safety requirements established by the distribution business. In almost all the jurisdictions, the legislative requirements and/or distribution businesses’ conditions regarding use of standard materials and terms of access to distribution infrastructure (e.g. electrical poles) for installation and maintenance purposes appear to constrain the practical ability to have these services provided by a third party.29

The individual distribution policies differ, however maintenance services are only provided as a standard regulated service where standard materials have been employed30. In South Australia, maintenance only services are facilitated by inclusion of a tariff which provides maintenance on a standalone basis in the negotiating framework. However in other states, the maintenance is dependent on ownership and access to the existing infrastructure. In Victoria, access for maintenance purpose has been restricted on safety grounds and a ‘no go zone’ for workers and some distribution businesses restrict access within this zone to employees by the licensed electricity distribution company. In Queensland, services provision is similarly restricted to distribution business accredited service providers and maintenance services are only offered in relation to distribution owned street light assets (which leads to gifting of assets for maintenance purposes).

In New South Wales, only Accredited Service Providers can design and install street lighting assets, however responsibility for accreditation of service providers sits beyond the distribution 26 AER (April 2014) Final Framework and Approach for SA Power Networks, p. 48-49.27 Interdepartmental Committee on Electricity Sector Reform (May 2013) Report to Government – Not

Government Policy, p. 77.28 State of Queensland (2013) Queensland Government Response to the Interdepartmental Committee on

Electricity Sector Reform, p.8.29 Green field sites are the general exception.30 Some distribution businesses provide the service as a non-standard service where materials or service differs

from the standard lists and charges for this are negotiated with the customer.


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businesses. Accreditation is administered by New South Wales Trade and Investment in accordance with the Electricity Supply Act 1995. Regardless, the distribution businesses will only maintain assets that are selected from their approved material list.

In addition to safety concerns, distribution businesses might also limit access to their distribution assets to prevent technical risks (however unlikely) that could potentially jeopardise the level of service they provide to distribution network customers. Technical risks include any potential risk that in performing installation or maintenance on a street light asset which makes use of an existing power pole, the security and reliability of the wider electricity network is threatened. Further, distribution businesses may act conservatively in relation to adding new lighting technologies to their standard service lists if they consider the failure rates of the lights and therefore the maintenance schedules required are not well tested or proven.

Safety and technical barriers to competitive entry outlined above are not within the AER’s control and would need to be addressed by the relevant state or Commonwealth agency.

Further consultation with potential competitors and stakeholders in each jurisdiction would be required to develop definitive conclusions and recommendations with regard to technical, legal and safety barriers.

Conclusion

Further investigation of safety and technical non-pricing barriers to competition may be warranted but would require further consultation and analysis.

3.3 Residual asset valuesWhen a customer requests that a distribution business replace an existing street lighting asset with an energy efficient equivalent before the end of the existing asset’s physical life, the AER has determined that the distribution businesses can recover a residual value of the asset from the customer.31 The residual value is referred to as the Written Down Value (WDV) of the asset at the time it is replaced.

Allowing distribution businesses to recover the residual value of an asset is important in a regulatory regime in which the regulated business is not permitted to set a price that could potentially over-recover the cost of an asset. As over-recovery is not permitted for street lighting assets, then distribution businesses would under-recover their investment if any of the assets were replaced early. Such a risk would be asymmetrical for the distribution businesses (downside potential with no corresponding upside opportunity), which would be a significant disincentive to investment in street lighting infrastructure.

The reason over/under-recovery is possible is that all street lighting assets of the same type are grouped into a single asset base. There is no differentiation or identification of the asset (within the regulatory asset base registers) based on age or location; and regulated prices, including the residual value, are determined on a “postage-stamp” basis and applied to all operational lighting assets, no matter how long they have been in service or where they are located.

Residual value charges are also appropriate from both an equity and a pricing signal perspective. Like businesses that supply ongoing payment terms for assets constructed in a competitive market, it is considered equitable that street lighting customers repay the full value

31 As evidenced in AER Determinations for Victorian, New South Wales, and Queensland.


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of assets provided to the customer, even if the customer replaces the asset before payment for the existing asset is finalised.

For economic efficiency, the customer’s decision to replace an asset early should not be affected by the repayments for an existing asset. Therefore, the customer should face the same present value cost for the existing asset (excluding ongoing operating and maintenance costs), regardless of whether it is replaced early or not. By facing the same charge for the existing (sunk) asset, the customer’s decision to invest in a replacement asset will be based only on the forward looking costs and benefits – including changed operating, maintenance and energy costs of the asset.

In concept, charging for residual values provides distribution businesses with appropriate incentives to invest in street lighting assets, and provides equitable outcomes and appropriate pricing signals to customers.

In implementing residual asset value charges, two important considerations are whether the residual value is being calculated correctly and whether the upfront payments for the residual value are an impediment to customers making efficient investment decisions. Each of these issues is addressed in turn below.

Calculating the residual value

The AER generally uses one of two forms of valuation approach to regulate street lighting:

Building block approach - The building block approach allows distribution businesses to charge customers a price that recovers operating expenditure, deprecation (to return the distribution business’s original investment over time), a return on the written down asset value, and any tax and non-system revenue allowances such as corporate overheads.

Under the building block approach, the residual value of an asset is the value that has not been recovered from the customer through depreciation charges – that is, the original cost of the asset less the depreciation to date (both adjusted for inflation).

In practice, the calculation of the written down value has been complicated by a lack of detailed historical records (see Box 1). Therefore, in some circumstances the AER has been required to apply assumptions regarding the remaining asset life or applied an alternative (but equivalent) form of the calculation:32

Residual value = Annual depreciation x Remaining life x No. of assets replaced x Inflation factor

Annuity charge approach – An annuity charge also recovers the operating, capital costs, tax, and non-system revenue allowances. The capital costs that are recovered over time are equivalent in present value terms to the depreciation and return on assets charged in the building block model, but smooth the result to ensure a consistent charge over time rather than a charge that reduces over time as the asset ages.

The residual value is more complicated to calculate under the annuity approach as the return of the initial investment varies from year to year. The AER has not presented a general formulation of the residual value calculation under the annuity approach. Where the annuity approach has been adopted (for post June 2009 assets in New South Wales), the AER has indicated that in the case of early replacement, a residual value will not be calculated but that the existing annuity payment for the replaced asset would continue to apply in addition

32 See for example, AER (2010) Final Decision, EnergyAustralia distribution determination 2009–10 to 2013–14, Alternative control (public lighting) services, p. 48.


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to the charge for the new asset. In the determination the AER have not specified the duration of the existing annuity payment – possibly because the relevant assets were only constructed recently and therefore the issue of replacement has not yet arisen. The AER notes that customers could negotiate with distribution businesses to make an upfront payment of the remaining value of the replaced asset.33

For clarity, we note that the annuity approach is simply an alternative means of charging for the capital cost of an asset and does not itself imply how residual values must be treated. If an asset is retired early, that asset will still have a residual value, although that value is more complex to calculate under the annuity approach than it is under the building block approach. Under both approaches, the residual can either be charged as an upfront value or as an ongoing payment stream. It is not clear from the AER’s recent decisions whether the additional complexity associated with calculating the residual value was the reason that an ongoing payment stream was preferred rather than an upfront payment.

The conceptual framework for calculating the residual value is sound, however verifying how the calculation has been applied in practice is difficult because the AER determinations do not always provide a sufficient level of detail for third parties (other than the AER and the distribution business) to confirm the calculation. However, we have no reason to believe the values have been calculated incorrectly.

We also note that to date, residual values have only been calculated under the building block approach. If the AER expands the application of the annuity approach to other jurisdictions, and repeats the New South Wales ruling, customers may not be required to pay an upfront residual value in the future. The AER currently has the necessary power to expand this approach to other jurisdictions as part of the determination process. The most appropriate method of facilitating the wider adoption of this approach would be through submissions to the AER during regulatory determination processes in each State.

33 AER (2010) Final Decision, EnergyAustralia distribution determination 2009–10 to 2013–14, Alternative control (public lighting) services, p. 44.


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Box 1: Historical complications in calculating WDV and revisiting historical valuations

Calculation of cost reflective charges for street lighting assets has been complicated by a historical issues related to existence of necessary data. Further, the AER’s power to revisit any historical asset valuation. The following issues relate to the historical recording of street lighting asset information:

Asset data bases for street lighting are of varying quality. In some cases, it was unknown which assets existed and in others the individual asset numbers were recorded but not the asset age.

Street lighting assets were historically not distinguished from or separately regulated to all other distribution service related assets. For example, the split between the asset types was first introduced in Victoria by the ESCV in 2001 and then used by the AER from 1 January 2008 when it commenced its role as economic regulator for electricity distribution networks. Where records for assets was of particularly poor quality, the split between the street lighting regulatory asset base and the regulatory asset base for other assets (and as such the starting regulatory asset base from which prices are determined and the written down values) required judgement in some cases.

Street lighting assets have historically been both recorded and administrated for billing purposes on an aggregate or average basis. In some cases, the direct cost to customers of both the assets and the energy costs have been ‘smeared’ across the customer base.

More recently, the information captured by street lighting asset data bases, including the age of assets for individual customers, has been improved and technology developments in IT have facilitated access to that information. GIS and computing technologies have significantly reduced the costs of maintaining accurate asset databases.

Upfront payments for the residual value

When the building block approach to regulating street lighting asset prices has been applied, the AER has ruled that customers requesting early replacement of an asset must pay the residual value to the distribution business in a single upfront payment. This issue was raised in a 2011 report by PwC that examined barriers to energy efficient street lighting:34

However, we consider there are factors which could improve the ability for councils to make this decision. One of the features of the AER’s decisions on the residual costs associated with existing street lighting assets is that councils would bear the full cost of upgrading their streetlights upfront in return for a flow of benefits over time. If councils were to face financing constraints, efficient options may not be undertaken even when the total benefits (received over time) exceed the upfront costs.

Accordingly, we consider there may be benefits in aligning the recovery of these costs with the benefits that can be achieved through energy efficient street lights. This can be achieved by allowing for the recovery of residual costs over the life of new installed assets. However, the option of different timing for the recovery of residual costs should be permitted for those councils which are able to pay residual costs upfront or within a shorter timeframe.

The AER has considered the case for extended payments in both Victoria and New South Wales and has in both cases rejected the proposition. In Victoria, the AER ruled:35

34 PwC (2011) Barriers to efficient streetlighting, prepared for the Equipment Energy Efficiency Committee, p. 3.35 AER (2009) Energy Efficient Street lighting Charges – Victoria, Final Decision, February 2009, p.46.


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Current street lighting charges are ‘smeared’ across customers, as there is only a single street lighting regulatory asset base (RAB), to ensure administrative simplicity. The AER does not consider it effective or efficient for distributors to maintain multiple RABs, by luminaire type, for each council.

The AER also recognises that a fixed written down value (WDV) could provide councils with an incentive to delay the retrofitting of T5 luminaires as early adopters would cross-subsidise later adopters. This effect can be removed if councils pay the WDV to distributors upfront when replacing MV80 luminaires with T5 luminaires.

Therefore, the AER’s final decision is made on the basis that the MV80 WDV is paid upfront by the council to the distributor at the time a T5 is retrofitted. This will limit cross subsidisation among councils.

The AER also noted that this should not prevent a council from having a separate instalment plan with their distributor to pay off the written down value over time. PwC noted:36

It is not clear however, should the prospect of cross subsidisation exist, how the approach taken by the AER would affect councils undertaking retrofits at different times. That is, a single residual value for all councils would only be relevant where they all undertake a retrofit at the same time.

Marsden Jacob has also considered the AER’s determination and similarly cannot reconcile the argument. It is not clear to us what exactly a ‘fixed written down value’ entails for ongoing payments. If ongoing regulated charges had the same present value as the upfront WDV, and this value changed over time as the WDV diminished, then council decisions on the timing of retrofitting should not be influenced by whether the payments are upfront or over time.37

In New South Wales, the AER presented an alternative argument:38

In its draft decision, the AER indicated that the residual charge for the replacement of assets before the end of their useful life could be paid upfront or through annual payments. However, having reviewed the issues raised by Integral Energy and EnergyAustralia regarding the complexities posed by annual payments for the NSW DNSPs billing systems, the AER accepts that the payment for the residual value of assets replaced at a customer’s request should be an upfront payment only.

This determination considers the administrative cost impact39 but does not explicitly weigh these up against external matters such as financial constraints faced by councils.

In the absence of administrative and broader financing considerations, regulators would typically be indifferent between whether the payment is made upfront or is an ongoing payment

36 PwC (2011) Barriers to efficient streetlighting, prepared for the Equipment Energy Efficiency Committee, p. 19.

37 This argument has been simplified for the purpose of brevity, and ignores the different discount rates and financing requirements of distribution businesses and councils.

38 AER (2009) Final Decision. New South Wales distribution determination 2009–10 to 2013–14, April 2009, p. 389.

39 Where an asset is retired early or otherwise replaced prior to end of its economic life ability to charge reflectively for the remainder of the old (defunct) assets life over a period as well as the charge associated with the replacement asset, duplicate data bases or asset entry recordings may be required. Depending on the individual distribution businesses database functionality, this could be a costly exercise relative to the overall benefit to the energy market. This may be further complicated where asset values must be individually accounted and valued. Marsden Jacob has not investigated the potential costs however IT developments in recent years have substantially reduced costs of this nature including potentially since the AER’s initial determinations.


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provided the net present value of the payment methods is the same. To date, the arguments put before the AER have led them weigh in favour of an upfront payment.

Treatment of WDVs in the Rules

As part of this engagement, Marsden Jacob was requested to investigate whether any issues identified with the treatment of WDVs for street lighting assets could be addressed in an amendment to the Rules.

The request was provided in response to the findings of the 2011 report by PwC which found recovery of the residual value for retired street lights over the remaining life of the asset rather than an upfront payment could provide benefits if financial constraints were an issue.40

The Rules and guidelines provided by the AER are currently drafted at a level that does not contemplate specific services such as street lighting or a precise approach for imposing price controls. Specific prices are established through the regulatory determination process. In Section 3.1, we have provided a more detailed consideration of if, and how, a Rule amendment could facilitate more detailed consideration of matters that affect efficient investment by customers, such as the financial constraints faced by councils.

Conclusion

In concept, the appropriateness of charging for the residual value of street lighting assets and their method of calculation by the AER is based on sound and reasonable economic and financial principles. Confirmation of the detailed application of the calculation on a case-by-case basis is not possible based on the level of information published by the AER.

Charging the residual value upfront when street lighting assets are retired early may prevent some councils from replacing assets with economically efficient alternatives if the council is capital constrained. The most effective means of raising this issue for the attention of the AER is likely to be through submissions as part of the regulatory determination process. In Section 3.1, we also consider if, and how, a Rule amendment could facilitate more detailed consideration of matters that affect efficient investment by customers, such as the financial constraints faced by councils.

3.4 Financing non-standard assetsStandard street lighting services (which usually include at least one energy efficient alternative) are recovered through regulated tariffs over the life of the assets. By contrast, payment for non-standard assets provided by a competitor is typically required upfront. The assets may then be required to be gifted to the distribution business for ongoing operation, maintenance and eventual replacement (other than ACT).

The need to pay for assets upfront would not distort the pricing signals if customer could obtain “off balance sheet” financing on terms similar to those implied in the regulated pricing arrangements. However, most alternative financing arrangements would be considered “on balance sheet” and, because local governments are typically highly averse to raising debt, the need to fund the assets upfront could prove to be a significant impediment to installing non-standard products.

40 PwC (2011) Barriers to efficient streetlighting, prepared for the Equipment Energy Efficiency Committee, p. 3.


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The AER does not regulate the type of services a business may offer and therefore will not mandate a particular product. A more appropriate avenue would be through modifications to the Australian Standards relating to road lighting (AS/NZS 1158 series), which for new schemes, while voluntary, are widely adhered to throughout the industry for liability and other reasons. For example, in 2010 AS/NZS 1158 series was modified to require that mercury vapour technology is not used in new installations and this has been widely followed by distribution business in Australia. We understand that new proposals for revision of AS/NZS 1158 are currently being considered by the Standards Committee.

A stronger alternative would be to ban the use less efficient technology through the application of Minimum Energy Performance Standards (MEPS). Marsden Jacob notes that this was recommended in the Ironbark report in 2011.41 Since the publication of that report, legislation has come into effect replacing each state and territory Act related to the regulation of energy efficient products. The Greenhouse and Energy Minimum Standards (GEMS) Act 2012 now regulates all product energy efficiency in Australia42 giving national effect to a MEP. The national legislation allowed for expansion of the Equipment Energy Efficiency Program (or E3), the national body currently charged with administering MEPS. A number of GEMS Determinations have been made for products including for incandescent lamps for general lighting services43. However, while the use of efficient lighting may offer significant energy savings for the councils concerned, consideration would need to be given to whether the overall energy savings and reduction in greenhouse gas emissions would justify regulatory action at the national level.

While the Australian Standards and MEPS provide an opportunity to effect the uptake of more efficient technologies, both these tools are most beneficial where the aim is to remove only the most inefficient of technologies. As the focus for street lighting is the availability of new technology at the more efficient end of the spectrum rather than at the inefficient end, drafting the Australian Standards or setting the MEPS at a level high enough to achieve desired outcomes would need to be investigated in light of costs, including loss of mid-level efficiency technology options, associated with such changes.

Where financial constraints represent a barrier to efficient lighting options which are not a standard offering by the distribution business, a further option to improve the uptake, is the wider adoption of the pricing approach adopted by the Queensland businesses. Both Ergon Energy and Energex only charge customers that request a non–standard street lighting assets (any service is not fully recovered through prices) the incremental cost difference between the standard and non–standard asset as a quoted service, with the remainder recovered through standard ongoing charges. This method has the advantage of minimising administrative complexity, while reducing the upfront financing burden for Councils. This option could be assessed by the AER under the Rule change proposed in Section 3.1. The proposal could be brought to the attention of the AER through a submission developed by customers or by one of more state governments. Until the issue is explicitly raised through a submission, it is unclear whether the AER would support a proposal that effectively requires distribution businesses to finance products from non-preferred suppliers.

41 Ironbark (July 2011) Draft Streetlight Energy Efficiency Strategy prepared for the Equipment Energy Efficiency Program, p. 19.

42 Equipment Energy Efficiency webpage ‘Changes to legislation in Australia’, accessed 15 June 2014, refer to: http://www.energyrating.gov.au/regulations/legislation/commencement-of-gems-legislation/.

43 Greenhouse and Energy Minimum Standards (Incandescent Lamps for General Lighting Services) Determination 2012. Available at: http://www.comlaw.gov.au/Details/F2012L02122.


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A final, non-regulatory solution to the issue of financing, may be to encourage infrastructure funds or other organisations to provide funding for the non-standard products. This option would require further analysis to overcome a number of potential hurdles, including the minimum size of the investment and whether bundling of assets would be required, and whether ownership and contractual arrangements will ensure that the assets remain “off balance sheet” for Councils (that is, Council’s the obligation to repay the investment would not be treated as a finance lease and therefore as borrowings).

Conclusion

If the installation of assets that are currently considered ‘non-standard’ by a distribution business is considered to be in the public interest, modifications to the Australian Standards relating to road lighting (AS/NZS 1158 series) or setting a higher MEPS would be an appropriate method of encouraging the adoption of those products. These tools would be effective in overcoming any inertia by distribution businesses in adopting new technology. However, the appropriateness of these tools to deliver on overall street lighting objectives would need to be further investigated as the Australian Standards and MEPS are most constructively used to remove the most inefficient technologies rather than facilitating changes on the efficient end of the technology spectrum.

The Rule change considered in Section 3.1, may also prompt the AER to consider whether distribution businesses should charge customers that request a non–standard street lighting assets the incremental cost difference between the standard and non–standard asset as an upfront payment, with the remainder recovered through standard ongoing charges. This outcome can also be facilitated by actively engaging the AER via submissions to the regulatory determination process.

Other non-regulatory solutions to financing could also be pursued.

3.5 Information availabilityPrevious studies on street lighting have indicated that energy efficient street lights will provide a lower whole-of-life cost to Councils than conventional lighting. Provided the regulatory regime allows the electricity distribution business to be appropriately compensated for the higher capital cost of the energy efficient street lights, both Councils and distribution businesses should support replacing old technology with energy efficient technology at the end of an asset’s life. While distribution businesses may not be motivated on a basis of the reduction in energy usage, to the extent that energy efficient technologies are either more expensive or promote increased capital expenditure for which they earn a return, the incentives of the distribution business should align with that of customers.

However, to date only two electricity distribution businesses are rolling out energy efficient lighting on the retirement of old assets of their own accord. Aurora has mandated the widespread replacement of old for new technology, whilst Endeavour Energy in New South Wales is replacing some mercury lights with efficient lights in minor streets at the end of their economic life.

Our analysis concurs with the study that efforts to “strengthen and develop communication within and to the sector”44 are required. In particular, communication with the distribution

44 Ironbark (July 2011) Draft Streetlight Energy Efficiency Strategy prepared for the Equipment Energy Efficiency Program, p. 27.


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businesses as an opportunity as well as clarification of information currently being provided to councils is suggested.

Of note, much of the information gap related to the range of technologies supported by distribution businesses may be attributed to safety, legal and technical barriers which are potentially better understood by distribution businesses than by street lighting customers.

Presentation of information

In some jurisdictions, the information provided to councils may be in a format that prevents easy analysis of the costs and benefits of changing to energy efficient street lights. While several years old, Marsden Jacob has reviewed of energy invoices provided to councils by energy retailers in Victoria. The review indicated that, while the distribution businesses are required to charge energy retailers on the basis of individual street lighting assets, at least some of the retailers have aggregated this information and translated it into an equivalent per energy unit cost when presenting invoices to customers. This presentation format makes it difficult for councils to understand the potential cost savings from replacing existing street lighting.

This issue is likely to be most prevalent where the distribution business and retail business are separate entities.

While it is unclear how widespread the issue is, or whether councils would use better presented information, further investigation may be warranted.

Financial expertise

Some councils may not have the financial and technical expertise to identify the costs and benefits associated with replacing existing street lighting assets with energy efficient alternatives. This includes understanding the ability for different technologies to essentially ‘capitalise’ the ongoing operation and maintenance costs such that the ongoing cost profile varies. This impediment might be overcome through the development and dissemination of information by governments. This information could take a number of forms, including a national report outlining the financial case for adopting energy efficient technologies, presentations to targeted audiences (in particular conferences and local government peak bodies), and potentially a ‘tool’ for calculating whole of life cost savings.

Conclusion

Based on an initial review of invoices provided to Victorian councils and discussions with distribution businesses in a number of jurisdictions, further investigation of the manner in which street lighting charges are presented to customers would be warranted.

In addition, it is likely that some councils may lack the financial expertise to identify the costs and benefits associated with replacing existing street lighting assets with energy efficient alternatives. Government agencies could assist by providing councils with better information regarding the financial case for adopting energy efficient technologies.


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4.Western Australia and Northern Territory

4.1 Western Australia In Western Australia, access arrangements detail the terms and conditions, including prices, which apply to third parties seeking the use of regulated electricity networks. The Electricity Industry Act 2004 provides the governing framework and a schedule to the Act, the Electricity Networks Access Code45 (Access Code), specifies the access arrangement proposal.

The legislation provides for the Ministers to declare coverage of a network and once covered, the network service provider is regulated via an access arrangement by the Economic Regulation Authority (ERA).

In Western Australia, street lighting services are provided by Western Power within the South West Interconnected System (SWIS) and by Horizon Power in the North West Interconnected System (NWIS). Only the SWIS network has been declared by the Minister as being ‘covered’ by the Access Code. As such, the ERA only regulates the street lighting services provided by Western Power.

Horizon Power operates as a Government Trading Enterprise, under the Electricity Corporations Act 2005 and under Section 61 of the Act is required to “act in accordance with prudent commercial principles, consistent with maximising long term value”. The State Government determines the electricity tariffs for customers in Horizon Power’s region. In order to ensure consistency with the State’s tariff equalisation policy electricity costs are subsidised.46 In relation to street lighting, Horizon Power’s policy on unmetered supplies clarifies that street light assets may be customer owned or Horizon Power owned.47 However it is unlikely that customers would find private ownership a competitive or preferable outcome since Horizon Power’s operations are currently not cost reflective.

The remainder of this section focuses on the regulatory framework applied to Western Power’s covered network.

Reference services

The Access Code requires that covered networks submit a proposed access arrangement to the ERA which specifies, among other things, the covered services to be provided. These services are sub-categorised as either reference services or non-reference services depending on the number of users and the portion of the market supplied by the network business.

Covered services are expressed as connection services, entry or exit services, network use of system services, common services or a service ancillary to the aforementioned covered services.48 They differ from excluded services, which are not covered by the access arrangement.

45 Gazetted versions of the Code available at: http://www.erawa.com.au/infrastructure-access/electricity-access/electricity-networks-access-code

46 The exception to the subsidy is government customers but this excludes local councils and shires.47 Horizon Power (24 October 2011) Unmetered Supply Policy. 48 Chapter 1, Clause 1.3 of the Electricity Network Access Code, definition for ‘covered service’


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Although street lighting services are not directly referenced as a service, the definition of a reference service would ensure that street lighting is provided by the network business for the foreseeable future.

For each covered service, the access arrangement must specify at least one reference service. Clause 5.2(b) requires that this reference service is sought by:

a significant number of users and applicants; and/or

a substantial proportion of the market for services in the covered network.

Street lighting has a number of users and a substantial proportion of these services are currently supplied by the covered network, Western Power. As such, Western Power has one reference service (A9) for streetlight connection and maintenance:49

An exit service combined with a connection service at an exit point on the low voltage (415 volts or less) distribution system for the purpose of public street lighting, plus the service of the provision and maintenance of the streetlight.

This service is available for customers, if the streetlight is a Western Power owned streetlight and standard contract terms and conditions, service standards and reference tariff applies.

The reference tariff specifies a fixed asset charge (cent per day) based on the type of streetlight asset supplied.

Pricing of reference services

The pricing objectives for reference services and arbitrated tariffs for non-reference services in the Access Code set out boundaries for the costs of street lighting services.

Reference tariffs which apply to Western Power’s standard street lighting offering are set with the objective of recovering the forward-looking efficient costs of providing the service (Clause 7.3(a)). The allowable range for tariffs that apply to an individual user is set by lower and upper bounds. The lower bound is set at a level equal to or greater than the incremental cost of service provision. The upper bound is set at a level equal to or less than the stand-alone cost of service provision.

An explanatory note for clause 7.3 provides guidance on tariff setting in practice. Specifically, it explains that although the objective of the pricing principals refers to charges paid by an individual user, “in practice reference tariffs will be set, and access arrangements will be assessed, by aggregating together groups of similar uses”.50

The recovery of efficient forecast costs, and lower and upper boundaries constitute the ‘primary objectives’ for pricing in the Code. However, secondary or ‘other objectives’ are also specified. Clause 7.4 states that pricing methods in an access arrangement must also have regard to:

(a) the charges paid by different users of a reference service differ only to the extent necessary to reflect differences in the average cost of service provision to the users; and

49 Western Power (April 2014) Amended Proposed Revisions to the Access Arrangement for the Western Power Network- Reference Services (Appendix to main document), p. 12

50 Electricity Networks Access Code 2004 (Unofficial consolidated version) dated 17 April 2012, p. 93-94.

Note: The official version constitutes the gazetted original versions and gazetted amendments, however, for practical purposes, the unofficial consolidated version updated by the Economic Regulatory Authority and maintained by the Public Utilities Office is used.


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(b) the structure of reference tariffs so far as is consistent with the Code objective accommodates the reasonable requirements of users collectively; and

(c) the structure of reference tariffs enables a user to predict the likely annual changes in reference tariffs during the access arrangement period; and

(d) the structure of reference tariffs avoids price shocks (that is, sudden material tariff adjustments between succeeding years).

Clause 7.5 in the Code (clause 7.5) then provides guidance on reconciling the ‘primary objectives’ and ‘other objectives’:

To the extent that the objectives in section 7.3 [primary objectives] conflict with the objectives in section 7.4 [other objectives] in respect of pricing methods in a proposed access arrangement, the [ERA], when determining whether the pricing methods are consistent with this Chapter 7, must reconcile the conflict, or determine which objective is to prevail, having regard to the Code objective but where necessary permitting the objectives in section 7.3 to prevail over the objectives in section 7.4.

The pricing principles applicable to street lighting reference services appear theoretically sound, however the extent to which averaging (as suggested in the explanatory note to clause 7.3) impacts individual customers inefficiently has not be examined.

In understanding the outcomes and comparing Western Australia to the NEM, the functions of the ERA as the responsible entity for approving the network’s proposal compared to the AER’s active making of the final regulatory determination is important.

The ERA may not have grounds to reject a proposal put forward by a network so long as it meets the specifications of the Code. This constraint results in an inflexibility to determine outcomes which might more preferably meet overall efficiency objectives and customers are more reliant on the specifics of the Code to ensure outcomes are achieved. Conversely, a greater level of discretion is arguably afforded to the AER through the need for it to make the final determination and hence submission to the AER, rather than amendments to the Rules may be more effective in influencing outcomes within the NEM (compared to under the Code).

Residual asset values

The capital charges associated with street lighting service are treated in the same manner as all other ‘revenue cap services’ provided by Western Power. The Access Arrangement prescribes a straight line depreciation method based on the existing weighted average lives for the distribution system assets that comprise the capital base at the start of each control period.51 Street lighting assets have an economic life of 20 years for depreciation purposes.52

In terms of allocating these costs between customers, street lighting assets are treated as a separate cost pool in derivation of the Distribution System Cost of Supply. The methodology allocates networks costs to street lighting customers as two separate components – the use of network costs53 and the costs associated with the streetlight asset itself.

51 Western Power (April 2014) Amended Proposed Revisions to the Access Arrangement for the Western Power Network, p.25

52 Ibid, p. 26.53 Costs for the use of the HV and LV networks and transformers are allocated on a fixed and variable basis as for

other customer groups, but with customer numbers reduced by a factor of 10.


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Streetlight asset costs are based on the average cost per light, as derived in the asset value applied over the total asset.54

Marsden Jacob did not uncovered evidence to suggest the methodology used by in determining residual asset values was inappropriate. Straight line depreciation of assets is a common methodology and the use of averages for the purposes of regulatory control is also not inappropriate.

Non-reference street lighting services

Charges for non-reference services, such as efficient lights not on Western Power’s standard list or the early retirement of street lights, are not specified in the Access Code. However, the amount Western Power can charge is restricted. The cost charged by Western Power for any modification or new streetlight on its network to be provided at forecast cost. Clause A8.19 states:55

the maximum ‘contribution’ for an ‘applicant’ who seeks … a modified or new streetlight, including provision of a new streetlight asset … is the ‘forecast’ cost for the ‘required work’.

Further, the arbitrated tariffs for non-reference services provide the pricing principles for these street lighting services. In the case of arbitration, the Code ensures that the awarded tariff for a non-reference services when compared to the equivalent reference tariff, is either:

the incremental cost of service for delivering service to a higher standard; or

the avoided costs of service provision for delivering service to a lower standard.56

The impact of this clause on prices for non-reference street lights should allow that prices offered align with the arbitrated outcome by virtue of the threat of an arbitrated outcome. However, Marsden Jacob acknowledges that this require understanding by all parties of the possible outcomes and consequences which may not always exist.

Conclusion

The methodology used to determine asset values and regulate the street lighting services under the Western Australian Electricity Access Code appear to be generally sound, however confirmation of the detailed application as it translates to an individual customer, in light of averaging techniques used to simplify the regulation, was not investigated.

Marsden Jacob recommends that further investigation in to the specific pricing from a customer perspective may be necessary in Western Australia although further consultation would be required to establish the specific concerns.

4.2 Northern TerritoryIn the Northern Territory, the Power and Water Corporation provides street lighting services on behalf of Councils and Government Departments. The standard service provision includes 54 Western Power (April 2014) Amended Proposed Revisions to the Access Arrangement for the Western Power

Network, p. 25.55 Clause A8.19 of the Electricity Access Code 200456 Clause 10.23 of the Electricity Access Code 2004


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electricity, repairs and maintenance, as well as the replacement of street light assets at the end of their life. The service is regulated by the Utilities Commission under the Electricity Network (Third Party Access) Code – a schedule to the Electricity Networks (Third Party Access) Act. 57

Ultimately, customers set the standards for street lighting levels, such that upgrading of street lighting or a decision to replace existing technology is the responsibility of local councils. Efficient LED street lights, for example, are currently being trailed in Darwin and, depending on the outcome, a further roll-out may be considered by the Power and Water Corporation and the City of Darwin.58

Standard (regulated) options are offered by the Power and Water Corporation. Non-standard assets may be negotiated between customers and service providers with minimal regulatory control. The regulatory framework and pricing of network services does not, in and of itself, hamper the development of a contestable service for street lighting in the Territory. However, two factors have existed which would impede any market development. Specifically: 59

prior to 1 January 2014, charges to Councils and Government Departments for street lights were bundled together as one charge; and

the bundled street lighting charge has not increased in line with costs such that true cost signals are not provided for street lighting customers.

These factors have recently been reviewed by the Power and Water Corporation. Street lighting charges are now unbundled such that electricity charges, capital charges (where Power and Water owns the assets), and operation and maintenance costs are provided for separately in price lists.60 From 1 July 2014 cost reflective tariffs also took effect.

Further information on the regulatory control framework and pricing for street lighting is provided below.

Regulatory framework

The NT Code provides the regulation of network access and service provisions by the Utilities Commission. This includes high level objectives of price regulation in achieving outcomes, such as efficient costs of supply, sufficient revenue to meet long-run costs, competition considerations61, a cost effective regulatory environment, regulatory outcome consistency and transparency.

For the first regulatory period (from 2000 to 2004) the NT Code provided much detail as to the determination required to be made by the regulator. However, for the second and subsequent regulatory control periods, the NT Code affords much greater discretion to the regulator. Clause 66(3) states that:

57 A peculiarity of legislations is that the Act specifically excludes the NT Code from being a law of the Territory. The Rules, by comparison, have force of law. See clause 4(2) of the Electricity Networks (Third Party Access) Act.

58 Refer to: http://www.powerwater.com.au/sustainability_and_environment/darwin_led_street_light_trial 59 Power and Water Corporation (18 March 2014) ‘Power and Water reviews and adjusts streetlight charge’

media release, accessed 17 June 2014. 60 Power and Water Corporation (undated) Schedule 1 - Northern Grid 2013/14, refer to:

http://www.powerwater.com.au/__data/assets/pdf_file/0011/54992/network_tariffs_2013-14.pdf61 Competition considerations include prevention of monopoly rent extraction by the network provider, and

promotion of competition in upstream and downstream markets and network services where reasonable.


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The revenue or price caps that are to apply during the second and subsequent regulatory control periods are to be determined by the regulator in a manner that:

(a) in the regulator's opinion, most effectively achieves the desired outcomes set out in clause 63 [high level objectives of price regulation]; and

(b) is consistent with generally accepted regulatory practice at the time.

The most recent network price determination for the Power and Water Corporation was finalised on 24 April 2014 and the controls will apply for the five year period starting 1 July 2014. In accordance with the discretion afforded to in clause 66(3), the position adopted by the Utilities Commission was to, where possible, use the approach used by the AER and the application of the relevant parts of the Rules, where consistent with NT specific legislation.62

As such, the regulation of street lighting services for the Northern Territory is very similar to that of the NEM jurisdictions and the reasoning and considerations are comparable.

Consistent with the AER’s approach, the provision, construction and maintenance of street lighting assets was classified as an alternative control service in the final determination.63 The service is part of the ‘fee-based service’ group. The Utilities Commission explains in the Framework and Approach Paper that fee-for-service functions are “provided to users for a fixed fee which is set out in a published price list”.64 The classification allows for fixed fees for homogenous services to be set in advance and for prices for specific service to be calculated based on the estimates of delivering those services plus a margin.

Written down values

In the 2014 final determination, the Utilities Commission considered separation of certain street lighting service costs from revenue or price caps in response to submissions raised. Costs related to repair and maintenance were considered to be separable from the cap.65 However, the use of the system charge for delivery of energy to street lighting was a regulated access service included in the revenue cap.

To this end, the determination of the regulatory asset base which was rolled forward into the current regulatory period specifically excludes the street lighting assets.66 This separation mirrors that which occurs in the NEM.

In the most recent determination, the Utilities Commission noted that within the Power and Water Corporation Network, cost allocation relating to street lighting represents the exception in a ‘less well developed’ system. 67 Street lighting services are separately recorded and allocation

62 Utilities Commission (undated) 2014 Network Price Determination webpage, accessed 17 June 2014. Refer to: http://www.utilicom.nt.gov.au/AboutTheCommission/consultations/2014/Pages/default.aspx

63 Utilities Commission (April 2014) 2014 Network Price Determination: Final Determination Part A – Statement of Reasons, p. 32.

Note that the determination actually classifies the services as ‘excluded network services’ rather than specifically ‘alternative control services’ because this is the appropriate definition under the NT Code. The effect of the classification and reason is intended to be the same as the ‘alternative control services’ usage under the Rules.

64 Utilities Commission (November 2012) Final Frameworks Approach Decision Paper, p. 40.65 Utilities Commission (April 2014) 2014 Network Price Determination: Final Determination Part A –

Statement of Reasons, p. 31.66 Ibid, p. 52.67 Utilities Commission (December 2013) 2014 Network Price Determination: Draft Determination, p. 48.


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of costs between standard control services and alternative control services are determined manually in an Excel spreadsheet.

Marsden Jacob uncovered no evidence to suggest that street lighting depreciation treatment was inconsistent with the treatment of other assets or that the written down value was incorrect from a methodological stand point.

Contestability and retail tariffs

Retail tariffs for customers consuming less than 750 MWh of electricity per annum, including street lights, are regulated through a Pricing Order (made by the Government) that specifies the maximum amount the Power and Water Corporation are able to charge categories of customers. The impact of network cost determinations on customer bills is limited by the Pricing Order. Previously the Pricing Order has include a bundled street lighting charge and as such, any changed determination relating to the network components of the service made by the Utilities Commission had no impact on the amount paid by customer for the service.68

From 1 January 2014, the Pricing Order only specified the electricity consumption component of street lighting services69 and as such, the ability for cost reflective pass through of network and street lighting costs made in the Utilities Commission’s 1 July 2014 determination is now facilitated.

Conclusion

As the Utilities Commission currently elects to make its determination in a manner which is consistent with the AER’s determinations and the applicable sections of the Rules, the consultation relevant to the NEM in this report are potentially also relevant to the Northern Territory.

Unbundling of service charges to improve customer transparency and cost reflectivity for street lighting services are now features of the market (from 1 January 2014 and 1 July 2014 respectively) and as such, more active customer participation in the market based on true costs and contestability of service provision is likely to be facilitated going forward.

68 Utilities Commission (undated) 2014 Network Price Determination – Final Determination Fact Sheet, p. 2.69 Northern Territory of Australia (17 December 2013) Electricity pricing order. Refer to:

http://www.utilicom.nt.gov.au/PMS/Publications/EPO_13d_01Jan2014.pdf


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Appendix 1: Draft Rule Change Proposal

SummaryThe Australian Energy Market Commission (AEMC) is requested to make a rule amending the National Electricity Rules (NER) to:

Clarify that explicit considerations of factors listed in the Rules by the AER apply to both the selection and the application of control mechanism for alternative control services;

To ensure that potential financial constraints faced by users and the ability for the control mechanism to inhibit the most economically efficient outcome for service users is explicitly considered in the AER’s determination for alternative control services.

The proposed rule change seeks to promote the efficient investment in and use of electricity services by ensuring that overall efficient outcome for consumers and their ability to participate in the market is actively considered as part of the AER’s distribution determinations for alternative control services.

The recommendation is the result of work undertaken by the Department in its role in leading COAG’s National Strategy on Energy Efficiency which includes a measure to improve the energy efficiency of street lights.

BackgroundCOAG National Strategy on Energy Efficiency

COAG’s National Strategy on Energy Efficiency includes a measure to improve the energy efficiency of street lights. South Australia is responsible for leading this measure on behalf of all jurisdictions. During 2010-2011, a draft National Streetlight Energy Efficiency Strategy was developed in consultation with stakeholders and PricewaterhouseCoopers was also engaged to identify market barriers to the installation of energy efficient street lights.

Current regulation arrangementsIn most jurisdictions, the public lighting services are provided by distribution businesses. As such, the services are regulated by the AER through the regulatory determination process.

Neither the Rules nor the guidelines are drafted at a level that contemplates specific services such as street lighting. As they may apply to a range of services, the Rules also do not specify a precise approach for imposing price controls.

The AER has classified street light services as alternative control services in most jurisdictions. The exceptions are South Australia where the service is regulated as a negotiate control service, and the ACT where the service is not regulated by the AER as it is provided by Roads ACT.

Classification of the service as negotiated results in light handed regulation by the AER. This includes the AER approving a ‘negotiating framework’ for the service as part of the determination process and the AER acting as arbitrator should negotiations fail.


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The classification of street lighting as an alternative control service results in regulation of the service separately from the remainder of network services provided by distribution businesses. The Rules provide some guidance as to the factors which need to be considered in determining the regulatory pricing control applied by the AER.

Currently, the AER must have express consideration of five factors listed in clause 6.2.5(d) when determining the regulatory pricing control. These are competition issues, administrative costs, previous regulatory arrangements and consistency of approach, and other factors.

The drafting of 6.2.5(d), if interpreted narrowly, suggests that the Rules only function to specify the regulatory price control must be selected from a list of ‘control mechanisms’ with reference to the stated factors, rather than allowing for the same considerations to feature in the application of the selected control. Under this interpretation, the Rules would then afford the AER complete discretion to direct the application of the selected control so long as the final determination is consistent with the NEO.

In practice, the regulatory process and determination may be influenced by submissions by stakeholders. Recent determinations have shown that street lighting issues have become a dominate feature of submissions.70 Despite the numerous submissions, the economically optimal solution of efficient public lighting does not appear to be widely accessible when a distribution business must be employed to provide the service.

IssuePrice signals are an important aspect of economic regulation and provide behavioural incentives to both suppliers and customers. Many of the issues raised in previous research relate not only to competition issues (which are an issue the AER must consider) but also to whether regulated prices are an impediment to the economically efficient replacement of existing street lighting assets with energy efficient alternatives.

The Rules do not currently expressly require the AER to consider whether the form of price controls would result in price signals which promote the most economically efficient outcome for the whole community.

While consideration of ‘any other relevant factor’ is provided for in clause 6.2.5(d), the available evidence suggests that the most economically efficient community outcome may not be occurring and therefore requires the AER’s deliberate attention. Importantly, customers of street lighting services are unlikely to have either the appropriate economic expertise or the resources to provide the necessary input into the regulatory determination process.

An amendment to 6.2.5(d) to require the AER to give explicit consideration to the possible impact of pricing controls on economically efficient investment in and use of street lighting services by customers may be broad enough to be appropriately included in the Rules and yet sufficient to facilitate more detailed consideration of pricing signals through the regulatory determination processes.

Other consequential issues considered

Other alternative control services

70 The number of submissions by different parties on the topic is disproportionate to the value of the assets in the scheme of distribution determinations – as evidenced by the NSW 2009-2014 determination and the QLD 2010-2015 determination.


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The proposed Rule Change has the ability to impact the decision made by the AER in relation to all distribution services which are deemed to be alternative control services.

Beyond street lighting, other services which have commonly been regulated as alternative control services include:

Metering services; and

Connection and augmentation services.

The same principles that apply to street lighting regulation also apply to these services. Further, where the classification of these services is driven by the potential for competition to emerge, it is likely that similar importance in price setting as a facilitator of market development will be a consideration.

Whether the Rule amendment would result in further explicit consideration in the case of these services would be left to the discretion of the AER.

Standard control services

Clause 6.2.5(c) relates to selection of control mechanism for standard control services. The drafting of this clause closely (but not exactly) mirrors that used for alternative control services.

Some consideration as to whether a similar change should be proposed for this clause has been provided, however it was determined that a change to clause 6.2.5(c) is unlikely to be required. Standard control services are by definition those where the possibility of competition is extremely low and the ability for costs to be directed towards a group or identifiable groups of customers is low.

Proposed Solution and Rule ChangeDescription of the proposed rule

The proposed rule would amend NER clause 6.2.5(d) to:

clarify the function of the clause as applying to both the selection of the control mechanism and the application of the selected control mechanism; and

include an additional factor requiring the AER to consider whether the control mechanism and the form of application for the control mechanism will enable the most economically efficient outcome for consumers of electricity.

Importantly, the intention of the proposed rule change drafting is that the AER assess this factor together with existing considerations and is not bound by this consideration alone.

Implementation and transition

As the Rule change, if accepted, would be implemented as part of each new determination process conducted by the AER after the Rule is made, there are no immediate implementation considerations.

Once implemented, the AER and stakeholders may incur some additional costs related to the considerations of the factor as part of the determination process however this is likely to be marginal when compared to the current costs associated with this process. Any indirect flow on costs resultant from differing AER price determinations would be considered by the AER as part of the determination process.


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Proposed Rule

This draft is based on version 62 of the National Electricity Rules.

6.2.5 Control mechanisms for direct control services (a) A distribution determination is to impose controls over the prices of direct

control services, the revenue to be derived from direct control services or both.

(b) The control mechanism may consist of:

(1) a schedule of fixed prices;

(2) caps on the prices of individual services;

(3) caps on the revenue to be derived from a particular combination of services;

(4) tariff basket price control;

(5) revenue yield control; or

(6) a combination of any of the above.

(c) In deciding on a control mechanism for standard control services, the AER must have regard to:

(1) the need for efficient tariff structures; and





(d) In deciding on a control for alternative control services, and the manner in which the control is applied, the AER must have regard to:





(5) the potential financial constraints faced by users and whether the control mechanism inhibits the most economically efficient outcome for users; and



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Stakeholder Engagement on this Rule change proposal

The concept of an amendment to clause 6.2.5(d) was briefly canvassed with a number of stakeholders and interested parties as part of a preliminary, informal consultation. Consultation consisted of telephone discussions and email exchange with the AER, the AEMC, several distribution networks, and local Council representatives.

The purpose of the consultation discussions was to test, in a general sense, stakeholder response on the amendment. Stakeholders were asked to consider an amendment 6.2.5(d) specifying the AER consider ‘the impact of the control mechanism on the economically efficient outcome for consumers’. They were then request to consider whether the insertion of such a clause might be interpreted in a manner which would influence the pricing and tariff decisions inherent in the control mechanisms and therefore facilitate resolution of street lighting issues related to the lagged uptake of new (efficient) lighting technology.

A number of stakeholders commented that the clause drafting would likely be “to general” to address the specifics of street lighting issues.

Stakeholders also commented that the original drafting appeared to restate the NEO which is considered by the AER (and the Rules) without need for specific statement. A concern in this regard was also raised that if the wording too closely restated the NEO that, aside from being an unnecessary insertion, there may be risk that the insertion prompts misinterpretation in suggesting that this was the only clause for which consideration of the NEO is required.

Staff from the AER and AEMC independently reflected that the clause functions to allow for the selection of control mechanisms from a list of options (in 6.2.5(b)) and therefore may not address the level of detail sought by the Rule change. Rather, the implementation of specific tariffs and prices are the subject of regulatory determinations, which require endorsement by the AER.

Further consideration was given to the wording of the Rule amendment and the specific issues that were to be addressed. Specifically, it was considered that:

despite the multiple submissions to recent determination processes on street lighting, the take up of efficient lighting technology continued to be limited (regardless of the apparent benefits to councils and other street lighting customers); and

lack of necessary expertise and resources among customers may limit the ability for street light customers to expressly state the issues, in terms that the AER could address with the various regulatory determination steps. Necessitating more active and express consideration of the relevant issues for these customers by the AER as part of the Rules may overcome this issue.


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How the Proposed Rule Change contributes to the National Electricity ObjectiveBefore the AEMC can make a rule change it must apply the rule making test set out in the National Electricity Law which requires it to assess whether the proposed rule will or is likely to contribute to the National Electricity Objective (NEO). Section 7 of the NEL states the NEO is:

…promote efficient investment in, and efficient operation and use of, electricity services for the long term interests of consumers of electricity with respect to –


(b) the reliability, safety and security of the national electricity system.

The proposed rule would benefit all customers in the long run as decisions regarding the selection of assets and the relative energy efficiency (and therefore electricity usage) would be better considered by users of electricity services.

It promotes more efficient use of the electricity services and promotes signals which enable efficient investment in the market.

Expected benefits and costs of the Proposed RuleBenefits

Explicit consideration by the AER of public lighting customers’ ability to finance services that have a high upfront cost but would be in the long term interests of those customers.

The removal of constraints that may inhibit efficient investments by consumers.

Costs

With the exception of the work involved in the AER’s additional consideration of the factor in its determination, there are no direct costs associated with the proposed Rule.

It is acknowledged that the proposed Rule could have indirect flow-on costs to both the AER and DNSPs should the AER’s determination result in a change of regulatory control or additional information is required in ensuring the decisions are supported. However, the drafting of the current Rules ensures that administration costs in particular are already actively considered by the AER when making a determination.

If the Rule is amended then the AER would be required to assess the potential costs of information collection and research against the potential benefits associated with applying the clause, as well as considering the five other remaining factors in clause 6.2.5(d).


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Appendix 2: Factors which facilitate the uptake of efficient street lightsWhile there are a number of barriers that limit the functioning of the street light service market, Marsden Jacob’s analysis has also identified several aspects which have facilitated the uptake of new efficient technology. These are summarised briefly as follows:

Marginal pricing for non-standard street lights. In Queensland, the AER determined that the upfront payment for non-standard assets would be only the difference between the standard price and the non-standard negotiated price. To the extent that street lighting customers face financial constraints which limit the ability for them to select non-standard lights, it is likely that such a pricing determination would facilitate the uptake of efficient street lights.

Annuity pricing approach rather than a building block approach to payment of residual values. An annuity pricing approach allows for a smooth, consistent price path over time where the same annual charge for an asset is imposed year on year. In comparison, the building block approach results in a diminishing price path as the asset ages and then an increase in the charges when the asset is replaced at the end of its life. Marsden Jacob considered that, although the depreciation calculations under an annuity pricing approach may be more complex, that the benefits of a stable charge may be desirable for customers of street lighting services who prefer price stability for planning purposes.

Contestability requirements clarified and encapsulated in binding Public Lighting Codes. Public Lighting Codes exist in both Victoria and NSW. They are a condition of distribution licences in Victoria and followed on a voluntary basis in NSW. The contestability requirements in the Victorian Code have ensured that competitive procurement of street lighting assets through a tender process is the norm.71 The contestability of project management, installation works and the ongoing operation and maintenance is voluntary. Currently, three of the five distribution businesses in the State have also agreed to allow the project management and installation works to also be contestable. However none of the distribution businesses allow operation and maintenance to be provided by third parties on their assets and as gifting of assets is often a requirement, this services will continue to be provided by distribution businesses going forward.

Government ownership and control of assets. In ACT, the street lighting assets are all owned and operated by Roads ACT. The ability to dictate the type of lighting technology and manage the associated maintenance and costs associated is similar to that for other unmetered public lighting services such as traffic lights and lighting on main arterial roads.

Collaborative action making use of expert intermediaries who facilitate negotiations and streamline processes for street light technology uptake with distribution businesses. Work initiated by the Victorian Municipal Council of Victoria with the assistance of Ironbark Consulting over a ten year period has vastly improved the ability for Councils to roll out efficient street lights. Similarly, the Southern Sydney Organisation of Councils has engaged an external consultant, Next Energy, to facilitate member Council’s ability to roll-out efficient street lighting. These intermediaries work with Councils and the distribution businesses to streamline negotiation processes and assist in the uptake of new technologies

71 Exceptions may be granted by the Minister upon request.


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including through facilitating negotiations with light suppliers. Victorian collaborative action is summarised as a case study in Box 4.

Box 2: Case study: Victorian collaborative action

The Victorian Public Lighting Approvals Board was initiated by Municipal Association of Victoria (MAV) and over 10 years work by MAV, Ironbark (as consultant) and VicRoads in conjunction with Victorian distribution businesses has resulted in creating what have now been described as “transparent” processes around public street lighting.

Work to set up approvals of new types of street lighting technology is completely separated from the procurement process and after initial work was completed, MAV and VicRoads have now been able to step back from the procurement process.

The Board, which was solidified on September 2009 in a Memorandum of Understanding (MoU), meets quarterly to go over any technology that should be approved. The AER has commented that MoU “specifically set out procedures for introducing new lighting technologies at any time in Victoria to meet environmental (and other) objectives”.72

Ironbark has been engaged by MAV to facilitate Councils with street lighting issues and create the streamlined processes in agreement with the Victorian distribution businesses for the bulk roll-out of efficient lights. The program has completed the streamlining of processes and now continues to be managed by Ironbark.

As a result of the engagement and work by the Victorian Public Lighting Board, there are now confirmed projects covering to remove around 183,000 inefficient 80 watt mercury vapour lights over the next four years (out of a total of around 380,000) in Victoria. 73

72 AER (October 2009) Victorian distribution determination final decision 2011-2015, p. 882.

Parties to the MoU include Victorian DNSPs, VicRoads, Victorian Local Government Association, Municipal Association of Victoria and the Victorian Department of Sustainability and Environment.

73 Ironbark (undated) MAV and Ironbark – Supporting Street light changes from start to finish website. For more information refer to: http://www.ironbarksustainability.com.au/lighting/mav-street-lighting-program/.

Municipal Association of Victoria (undated) Frequently asked questions – energy-efficient street lighting, prepared by Ironbark for MAV Procurement, p. 3.


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Appendix 3: Upcoming regulatory determination processesThe AER makes regulatory determinations for distribution businesses in each jurisdiction based on a process described in the Rules. Determinations are applicable for a five year period (although transitional or placeholder determinations may vary the length of the period).

The formal consultation process begins with the AER’s publication of an issues notice on the need for a Frameworks and Approach process 30 months prior to the end of the current determination period. The Framework and Approach paper sets out the high level regulatory classification (negotiated, standard control, alternative control or unregulated) for specified services including street lighting (where applicable). The classification then services to limit the form of regulatory pricing control. Although Framework and Approach findings are not binding (the AER may make a determination in the regulatory process which differs from the approach originally specified in the Framework and Approach paper), submissions during this period would be most effective in resulting in changed regulatory treatment of street lighting services.

The Frameworks and Approach process concludes 23 months before the end of the current determination period at which point the regulatory proposal process commences. The regulatory process then lasts just under two years until 2 months prior to the start of the next determination period. Submissions to the AER during the proposal process are most relevant if they concern particular pricing detail (rather than the higher level classification).

Tables on the following pages set out the key dates for the current Framework and Approach and the regulatory proposal processes for each jurisdiction.

Regulatory review processes are currently underway in a number of jurisdictions as such, the next opportunity to feed into the Frameworks and Approach processes would be as follows:

Victoria – submissions on the proposed approach contained in the Framework and Approach paper closed on 21 July 2014. The AER will make a determination on the Framework and Approach paper by 31 October 2014.

Tasmania – The need for a revised Framework and Approach will be consulted on in November 2014, following the AER’s initial findings, new approaches would be consulted on in February 2015.

New South Wales/ ACT and Queensland/ South Australia - Dates for the next Framework and Approach processes for these jurisdictions are yet to be confirmed as the AER is currently part-way through a determination process. However, it is estimated that the next consultation on Frameworks and Approach would occur from January 2017 (New South Wales/ ACT) and January 2018 (Queensland/ South Australia).74

74 This estimate is based on the need for the Frameworks and Approach process to commence 30 months prior to the end of a regulatory period.


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Table 1: AER 5-year regulatory determination calendar (framework and Approach)

Jurisdiction Service provider Form of transitional arrangement (length of process)

Regulatory control period

Framework and Approach (F&A)

DNSP notifies AER on value

of dual function assets

NSP notifies AER on need for F&A stage

AER consults on need for

F&A for component not

triggered by NSP

Notice on need for F&A issued

Position paper published

F&A paper published

NSW/ACT Ausgrid, Endeavour Energy, Essential Energy, ActewAGL

Placeholder determination (3 months)

1 Jul 2014 - 30 Jun 2015 n.a. n.a. n.a. n.a. n.a. n.a.

Full determination (11 months)

1 Jul 2015 - 30 Jun 2019 30 Jun 2012 n.a. n.a. Part 2: 30

Nov 2013 n.a.

Part 1: 31 Mar 2013

Part 2: 31 Jan 2014

Qld/SA Energex, Ergon Energy, SA Power Networks

Preliminary determination with mandatory re-opener (12 months)

1 Jul 2015 - 30 Jun 2020 30 Jun 2013 31 Jul 2013 31 Aug 2013 30 Sep 2013 Nov 2013 30 Apr 2014

Vic CitiPower, Powercor, Jemena, Jemena, SP AusNet, United Energy


1 Jan 2016 - 30 Dec 2020 31 Dec 2013 31 Jan 2014 28 Feb 2014 31 Mar 2014 May 2014 31 Oct 2014

Tas Aurora Energy No transitional arrangements (15 months)

1 Jul 2017 - 30 Jun 2022 30 Oct 2013 31 Oct 2014 30 Nov 2014 31 Dec 2014 Feb 2015 31 Jul 2015

Source: AER 5 year project calendar 2013-2017 (updated 30 September 2013). Available at: http://www.aer.gov.au/networks-pipelines/determinations-and-access-arrangements


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Table 2: AER 5-year regulatory determination calendar (Regulatory Process 1 of 2)



Regulatory Process

Expenditure forecasting methodology submitted

Regulatory proposal due

Issues paper published

Public forum held

Submissions close



1 Jul 2014 - 30 Jun 2015 n.a 31 Jan 2014 n.a. n.a. n.a.


1 Jul 2015 - 30 Jun 2019 30 Nov 2013 31 May 2014 n.a Jul 2014 Aug 2014



1 Jul 2015 - 30 Jun 2020 30 Nov 2013 31 Oct 2014 n.a Dec 2015 Jan 2015



1 Jan 2016 - 30 Dec 2020 31 May 2014 30 Apr 2015 n.a Jun 2015 Jul 2015


1 Jul 2017 - 30 Jun 2022 30 Jun 2015 31 Jan 2016 29 Mar 2016 Apr 2016 May 2016



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Table 3: AER 5-year regulatory determination calendar (Regulatory Process 2 of 2)



Regulatory Process

Draft decision published

Predetermine conference held*

Revised regulatory proposal due*

Submissions close*

Cross submissions close*

Final decision published



1 Jul 2014 - 30 Jun 2015 n.a. n.a. n.a. n.a. n.a. 30 Apr 2014


1 Jul 2015 - 30 Jun 2019 30 Nov 2014 Dec 2014 Jan 2015 Feb 2015 n.a 30 Apr 2015



1 Jul 2015 - 30 Jun 2020 30 Apr 2015 May 2015 Jul 2015 Jul 2015 n.a 31 Oct 2015



1 Jan 2016 - 30 Dec 2020 31 Oct 2015 Nov 2015 Jan 2016 Jan 2016 n.a 30 Apr 2016


1 Jul 2017 - 30 Jun 2022 30 Sep 2016 Oct 2016 Dec 2016 Jan 2017 Feb 2017 30 Apr 2017



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