Transmission Network Investment

Speech to International Energy Agency OECD Paris 18-19 November 2004

Joe Dimasi Executive General Manager Regulatory Affairs Australian Competition and Consumer Commission

Synopsis: This paper highlights some of the changes occurring in the Australian national electricity market, designed at providing better incentives for transmission investment. These changes include a move to an ex ante capital expenditure assessment within the regulatory framework, amendments to the detail and application of the regulatory test for new transmission investment, and analysis of transmission constraints on market outcomes.

Introduction Australias National Electricity Market (or NEM) is an interconnected transmission system running from the north eastern parts of Queensland, down to South Australia. It was developed under the auspices of the Council of Australian Governments, in recognition of the likely efficiencies that could be achieved through implementation of national arrangements, including greater interconnection between the states. The NEM includes the states of Queensland, New South Wales, Victoria, the Australian Capital Territory (located wholly within NSW), and South Australia. In May 2005 the island state of Tasmania will form part of the NEM. Australias other two states Western Australia and the Northern Territory are unlikely to become interconnected because of the distances involved.

The national electricity market is a regional market which, largely, is based along the state borders (Queensland, New South Wales, Victoria and South Australia), with the exception of the Snowy region which is also in New South Wales. Traditionally the energy needs of consumers were met by state based vertically integrated electricity monopolies. These organisations were responsible for all aspects of electricity supply generation, transmission, distribution, and sales to end users. State based transmission investments therefore followed population growth and as a result the transmission system in Australia today is elongated. It is well over 5000km in length with very little meshing for most of that distance. The state based regime also meant that there was very little interconnection between the states. The introduction of a national electricity market in December 1998, along with a third party access regime administered by the Australian Competition and Consumer Commission (ACCC), saw significant levels of investment in interconnection between

the states as well as a vast improvement in the reliability of intra state transmission facilities. That is not to say, however, that the arrangements are by any means perfect. In fact, the ACCC is currently reviewing its revenue cap setting process after five years of experience and is looking to introduce greater incentives for efficient transmission investment. This is the topic of my presentation today. Transmission investment outcomes The Australian national electricity market allows both regulated and unregulated transmission investment although unregulated transmission is limited to investments between regions. Transmission investment outcomes in the NEM have been strong since its commencement and the trend is not expected to alter in the near future. The ACCC commenced regulation of transmission businesses on a progressive basis since 1999 and has set the revenues of all the regulated transmission businesses in the NEM. The table below provides a comparison of the ACCCs capital expenditure allowances as per its revenue cap decisions and compares it with the expected or actual capital expenditure programs of the regulated businesses. To put it into some sort of context the capital expenditure allowances are also presented as a proportion of the transmission business asset base. Table 1: Regulated Transmission in $AUD million Expected or Asset base Capital DORC actual expenditure (ORC) capital allowance expenditure over 5 years Expected or actual capital expenditure as a proportion of the asset base 62% (32%) 56% (39%) 38% (21%) 43% (23%) 51% (31%) 44% (30%)

Transgrid (NSW) Powerlink (Qld) SPI PowerNet (Vic) ElectraNet (SA) Transend (Tas) Total
*

$ 881 m $ 1,040 m $ 700 m $ 358 m $ 307 m $ 3,286 m

$ 1,195 m* $ 1,280 m > $ 700 m > $ 358 m $ 307 m $ 3,840 m

$ 1,935 m ($ 3,726 m) $ 2,276 m ($ 3,300 m) $ 1,835 m ($ 3,356 m) $ 824 m ($ 1,585 m) $604 m ($ 1,000 m) $ 7,474 ($ 12,976)

denotes actual expenditure

It is evident that as a proportion of the opening asset base the capital expenditure allowances for the transmission businesses has been significant. Based on the information provided to the ACCC as part of its annual reporting requirements, it is interesting to note that while the two government owned transmission companies have significantly overspent, or are likely to overspend, their capital expenditure allowance as per their revenue caps, the privately owned companies seem to be heading for an underspend1. On the face of it the existing regulatory framework seems to have had different incentive effects, depending on ownership structure. However, the capital investment results also reflect greater than expected load growth over the period in some areas, lumpy investment schedules, as well as delays and rearrangements in investment schedules. The existing and evolving governance and regulatory arrangements place some conflicting incentives upon transmission companies in the national electricity market. As well as the apparent differing incentive effect due to ownership structure, the transmission companies also retain an apparent regional or state focus when considering transmission investment, rather than a national focus. The state based focus means that transmission networks are built somewhat differently than would be the case if a national transmission planner was responsible for network development. I will touch on the governance arrangements a little more below. As mentioned above, investment in the NEM can also be made on an unregulated basis. There have been two unregulated transmission investments in the NEM, Murraylink and Directlink with a third scheduled for completion at the end of next year, Basslink. Together it is estimated that these investments have totalled $AUD1 billion. Taken together, the total transmission investment in the NEM has been around $AUD 4.8 billion. As a result, the NEM which was a system of loosely interconnected state based markets has become much better interconnected. This transition is demonstrated in Figure 1 below. The figure on the left outlines the interconnector locations and capacity prior to the commencement of the NEM. It is interesting to note that in the figure on the left both Queensland and Tasmania do not form part of the NEM. The figure on the right highlights both the regulated and unregulated interconnection between Queensland and New South Wales, the increase in capacity on the interconnector between the Snowy and Victorian regions, the new interconnector between Victoria and South Australia and the proposed interconnector linking Tasmania to the NEM.

ACCC, Transmission Network Service Provider: Electricity Regulatory Report for 2002/03, August 2004

Figure 1:

Comparison of Pre and Post NEM Interconnection

Recognition of the regional focus of transmission company investment decisions is widespread, and a number of tools exist that can provide a more national perspective. In particular the market manager, (the National Electricity Market Management Company) NEMMCO, is now publishing an annual national transmission statement intended to provide an integrated overview of the current state and potential for development of major national transmission infrastructure. However the annual national transmission statement is not meant to be, and is unlikely to be as effective as, a national transmission planner.

Governance arrangements The national electricity market operates as a gross pool with a single system manager, NEMMCO, responsible for system security, reliability and dispatch within the market. There are currently four main transmission companies: 2 privately owned and 2 remaining in state government ownership. A fifth transmission company, also state government owned, will join the market when Tasmania becomes interconnected with the mainland. The arrangements for transmission planning and ownership differ throughout the NEM. In Queensland and New South Wales transmission planning and operation of the transmission networks are undertaken by for profit state owned entities. In Victoria, a not for profit organisation is responsible for planning transmission enhancements while a for profit owner is responsible for network operation and maintenance. In South Australia a government body is responsible for publishing planning information and providing advice on network enhancements but a for profit organisation is still responsible for investing in and operating the network. A similar arrangement exists in Tasmania where the transmission network owner is required to consult with a state body on network enhancements but ultimately has responsibility for those decisions. The responsibilities of the various organisations are described in the figure below. Figure 2
TransGrid (NSW)

Transmission governance arrangements

Powerlink (QLD) SPI PowerNet and VENCorp (VIC)
Network planning

ElectraNet and ESIPC (SA)

Network planning

Transend and RRNP (TAS)

Network planning

Network planning

Network planning

Investment

Investment

Investment

Investment

Investment

Asset Ownership

Asset Ownership

Asset Ownership

Asset Ownership

Asset Ownership

Not for Profit Entity For Profit Entity

Source: Firecone, Regulatory and Institutional Framework for Transmission, November 2003

Irrespective of the transmission planing and ownership arrangements the operations of the transmission businesses are governed by the National Electricity Code. The national electricity code2 has been adopted by the participating jurisdictions as the instrument which underpins the operation of and participation in the national electricity market. The national electricity code imposes requirements on
2

National Electricity Code, National Electricity Code Administrator, Adelaide, Version 1.0, 1996

transmission companies regarding network pricing, network connection and third party access arrangements. The governance arrangements in the national electricity market are undergoing some fundamental changes, with the creation of two new bodies: The Australian Energy Markets Commission will take on the role of market development for electricity and gas markets in Australia, including the development of the national electricity code. The Australian Energy Regulator will initially undertake the regulation of electricity transmission companies. In the future the Australian Energy Regulator will also be responsible for gas regulation and regulation of electricity distribution companies. The Australian Energy Regulator will also be responsible for surveillance and monitoring of the national electricity market. The Australian Energy Regulator will be a constituent part of the ACCC but will operate as a separate legal entity.

It is expected that the AER and the AEMC will commence operations in the first half of 2005. At that time the AER will take over from the ACCC as the electricity transmission revenue regulator. However, the key point remains that in the national electricity market there is (and will continue to be) a single regulator for all transmission companies in the market, consistently applying a single set of regulatory principles. Regulation of transmission networks existing arrangements The rules governing how the ACCC regulates transmission businesses are set out in the national electricity code. The national electricity code constrains the ACCC to applying incentive based regulation in the form of a CPI-X revenue cap or some variant of a CPI-X revenue cap. The code requires that the minimum regulatory period is for 5 years. The ACCC used the objectives set out in the national electricity code to formulate a guiding set of regulatory principles, which it published in 1999 (albeit in draft form).3 The regulatory principles use a building block approach to determining a CPI-X revenue cap for the transmission companies. Expressed in the simplest form, the building block equations are as follows: MAR = = return on capital + return of capital + opex + tax service standards (WACC * RAB) + D + opex + tax S

Draft statement of principles for the regulation of transmission revenues, ACCC, May 1999

Where: MAR WACC RAB D opex tax S = = = = = = = maximum allowable revenue post-tax nominal weighted average cost of capital regulatory asset base depreciation operating and maintenance expenditure expected business income tax payable service standards

Based on the ACCCs experience as transmission regulator, the asset base and capital expenditure constitute greater than two-thirds of a transmission business revenue cap. The ACCCs current and future approaches to setting the asset base, capital expenditure allowance are discussed in turn below. The service standards regime will also be discussed in light of the ACCCs proposed way forward. The asset base The code gives the ACCC the ability to revalue all assets every five years on the basis of up to date replacement cost estimates, adjusted for asset age (through depreciation), and optimising out redundancy, referred to as the DORC valuation methodology. Repeated revaluation, however, creates its own problems such as the level of uncertainty that a transmission business might be subject to. A transmission business invests now knowing that the investment will be re-valued every five years which could potentially lead to significant variations in the value of the asset base from one period to the next. That revaluation might result in a windfall gain or downward loss for the transmission business but either way, it creates a risk that an investment now might be devalued in the future and the costs of the investment may never be recovered. Capital expenditure Turning to capital expenditure, the national electricity code is non-prescriptive on how new or proposed capital expenditure should be reflected in the regulatory asset base. However, it contains some high level principles from which the ACCC has determined a capital expenditure framework. The framework was developed in light of its experiences in setting revenue caps for gas transmission networks in Australia. The ACCCs approach to assessing and approving capital expenditure can be considered to consist of three elements: The reasonableness test at the start of the regulatory period; The application of the regulatory test by the transmission business; and The ex-post prudency assessment at the end of the regulatory period.

The reasonableness test The first element, the reasonableness test, requires that the ACCC conduct an assessment of the reasonableness and efficiency of a transmission business proposed

capital expenditure program for the forthcoming regulatory period. In doing this the ACCC considers future demand growth, generating patterns, network limitations and any other relevant information. This could manifest itself in the transmission business providing the ACCC with a specified list of projects which it considers will meet the needs of the system. Alternatively, because of the complexity and uncertainty in forecasting capital expenditure, it could be done on a probabilistic basis. That is, probability weighting the likelihood of a particular project proceeding on the basis of where generators will locate or when load will eventuate. In large, the reasonableness test is to ensure that the transmission business has sufficient cash flows over the regulatory period to meet its likely obligations. It is not intended to act as a discipline on the transmission business behaviour. The regulatory test The application of the regulatory test by transmission businesses during the regulatory period is the second element. With the creation of the national electricity market, network investment decisions needed a framework which ensured economic efficiency, prudence and competitive neutrality. As a result the ACCC was required to develop a test for network investment - the regulatory test4. The regulatory test is based on the traditional cost-benefit analysis framework but with a number of qualifications to limit any adverse impacts that regulated network investments might have on the contestable parts of the industry. The regulatory test has two limbs: a reliability limb and a market benefits limb. Where transmission network augmentations are required for reasons specified in the national electricity code or state based licensing arrangements (i.e. reliability grounds) the regulatory test requires the transmission companies to demonstrate their preferred option is least cost and meets relevant code and jurisdictional obligations. Where transmission network augmentations are constructed for economic reasons the transmission business needs to demonstrate that its preferred option maximises the benefits to the market using cost benefit analysis tools. Transmission companies are required to apply the test to network enhancements in excess of $1 million, but the process they use depends upon the size and type of the proposed augmentation. Interested parties are able to provide submissions to transmission businesses through the course of its regulatory test application, which the transmission business is required to take into account in finalising its regulatory test application. Relying on the regulatory test process, however, requires that the checks and balances set out in the code are appropriate. It is not clear that these checks and balances work effectively. The first check comes from a transmission business consultation on its application. Due to the information asymmetry issue, interested parties are unlikely to possess sufficient skills, expertise, resources or time to make an informed assessment.
4

Regulatory test for new interconnectors and network augmentations, ACCC, December 1999

The evidence shows that, with the exception of interconnector investments, many applications of the regulatory test have undergone little critical assessment by interested parties. The second check comes by way of an appeals process. Interested parties are able to appeal a decision where they have an interest in the outcome of the process. The ex-post prudency assessment At the regulatory reset, the ACCC considers differences between the forecast capital expenditure allowance approved in the previous decision with the actual capital expenditure undertaken by a transmission business considering all relevant information for any variations between the two. This is the third element, known as the ex-post prudency assessment. The prudency test means that the ACCC would roll into the regulated asset base the amount that would be invested by a prudent TNSP acting efficiently in accordance with good industry practice. This potentially involves the ACCC assessing every single project undertaken by the TNSP during the regulatory period and assessing whether the investments are prudent and/or efficient. As with periodic revaluation, relying on ex-post optimisation creates uncertainty for transmission businesses when investing. The ACCCs task in determining which projects are efficient is not a straightforward task. It requires detailed analysis and potentially involves a time and resource intensive analysis of the need, technical specification, costs and benefits of each project at the time that the investment is made. In the context of the New South Wales revenue resets, the ACCC has been assessing the adequacy of a range of projects undertaken by the businesses. Through this process the ACCC is effectively stepping into the shoes of the regulated business and reassessing every one of its investment decisions. Problems with the capital expenditure framework It appears that some of these elements may contradict one another and that the relationship between others is unclear. While it is not altogether explicit, there is an expectation from the transmission businesses that if a network enhancement is justified under the regulatory test then they will be compensated for the cost of implementing that option. On the other hand the national electricity code enables revaluations at the end of each regulatory period to ensure that they have been prudently made. This uncertainty and in particular the risk of asset optimisation by the regulator creates a disincentive for investment in transmission facilities. Service standards Transmission companies can maximise their profits by reducing actual costs below forecast levels. While such cost reductions could occur because of improved efficiency, it could also be a sign of reduced service quality. This results in an

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incentive for transmission companies to maximise profits at the expense of service quality. There are two sets of standards that the ACCC must consider when setting a revenue cap reliability standards and service standards. In the Australian context, reliability standards refer to standards which set out the need for the construction of new facilities. They generally tell you what to put in the ground and where, largely driving capital expenditure decisions. Service standards on the other hand set out standards for the efficient operation of those facilities. They relate to the most efficient use of what is currently in the ground, thereby driving operating and maintenance decisions. Reliability standards in the NEM are set by the state licensing authorities and the national electricity code. Service standards can be set by the ACCC. The ACCCs current service standards guidelines set out measures of transmission network performance based on the frequency and durations of network outages.5 The performance incentive scheme uses the transmission companies past performance as a benchmark (or target) for their future performance. The scheme provides each transmission company with the financial incentive to achieve performance greater than their respective benchmark. The financial reward/penalty is calculated using a known formula set out in each revenue cap determination. This scheme is being introduced to transmission companies revenue caps, and currently four transmission companies are participating in the scheme. Unfortunately, the service standards scheme may not be enough to encourage efficient behaviour. Measures of the frequency or duration of service interruptions are not much use at the transmission level because transmission network outages rarely lead to an interruption in supply to end-users. Transmission networks are conventionally built with a reasonably high level of redundancy the network is designed and operated so that, even after the failure of any one piece of equipment (whether a generator, a large load, or a piece of the transmission network itself) the power flows over the remaining network will not exceed the capability of that network. As a consequence, measures of service quality based on supply interruption have not proven to be very useful for measuring service quality in transmission networks. Regulation of transmission networks future arrangements The underlying objective of the regulatory changes proposed by the ACCC is to improve investment outcomes. By this I mean not just getting the amount of investment right, but also efficiency in the choice and delivery of investment projects. While we can measure the amount of investment that has occurred in the national electricity market, which the tables above highlight is significant, we cannot necessarily comment on its efficiency from a whole of market perspective.

Statement of principles for the regulation of transmission revenues, service standards guidelines, ACCC, November 2003

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For this reason the ACCC is proposing some reforms to the setting of the asset base, capital expenditure and service standards which is aimed at ensuring that the correct investments come on line at the correct time. The asset base Establishing a valuation for existing assets has been necessary in moving from government ownership to formal regulation by an independent regulator. The ACCC intends to resolve the uncertainty of periodic revaluation by locking-in the asset base. It proposes to do this by adopting the initial jurisdictional valuation for the first revenue cap decision, which it has already done, and adding in new investment at cost. The attraction of this option is that a lock-in of the jurisdictional asset base is unlikely to deter new investment and will produce a smoother price path than periodic revaluations. The added attraction of this approach is that it will ensure consistency with the capital expenditure framework. Capital expenditure The codes objectives require that the regulatory arrangements allow an appropriate return to efficient investment. The ACCC believes that the codes objectives can be better achieved in a regime which provides approval for investment decisions ex-ante. The proposed ex-ante approach involves the ACCC establishing an ex-ante cap on the transmission business capital expenditure at the start of the regulatory control period. The transmission business is free to decide on the size and timing of its projects to meet statutory and code obligations. Importantly, the ACCC will not conduct an expost prudency assessment of the transmission businesses investments. In the main it contains the following key elements: An ex ante cap which covers most or all expected investments during the regulatory period; and A mechanism for separate, project specific regulation for very large and uncertain investments.

The ACCC believes that the main benefit of moving away from its current approach to approving capital expenditure ex-ante is that it increases investment certainty by eliminating ex-post prudency assessments. This makes it consistent with the ACCCs preferred option of locking-in the jurisdictional asset base. The ACCC has recently published a draft version of its revised regulatory principles6 which incorporate changes with respect to the incentives facing the transmission companies, reducing the perceived regulatory risk and increasing the transparency of regulated outcomes.
6

Statement of principles for the regulation of transmission revenues, draft decision, ACCC, August 2004

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Role of the regulatory test The role of the regulatory test in this process has been elevated and is now more clearly defined. When setting the revenue cap the ACCC will scrutinise whether the proposed projects put forward by the transmission business will satisfy the regulatory test. The ACCC will consider what the need for the project is, and whether the type and timing of the project appropriate. For very large and uncertain projects which sit outside the cap, it is intended that the regulatory test value is the value that will be rolled into the asset base at the re-set. To address the issues about insufficient scrutiny the ACCC will be actively involved in the regulatory test application ensuring that the transmission business applies it appropriately. To ensure that the regulatory test meets these new requirements, the ACCC has recently undertaken a review of the test and a new regulatory test has now been introduced. The new regulatory test better aligns its terms and definitions with the standard terms and definitions in the national electricity code and generally accepted cost benefit principles. It also introduces the option of competition benefits measure in the assessment of new investments. The concept of competition benefits recognises that generators can, at times, exercise their market power and that increasing the capacity of transmission lines within reason is one method to mitigate short term generator market power. The move to the ex-ante capital investment framework is generally seen as providing greater regulatory certainty to transmission companies. The ACCC believes that this can help create stronger and more efficient transmission investment outcomes in the national electricity market. Service standards The elongated nature of the interconnected transmission network in Australia means that a transmission constraint or outage can have a much greater impact on market outcomes than is the case in a more meshed network environment. Recognition of the impact of the operation of the transmission network on market outcomes is probably a more useful measure than to consider network availability and outages. The Ministers of the NEM states have signalled that a greater understanding of the impact of transmission constraints on market outcomes is needed and an incentive scheme to align transmission performance with market outcomes should be developed. In response, the ACCC has commenced work on quantifying the impact of transmission constraints and is looking at designing an incentive scheme to get transmission companies to minimise the impact of transmission constraints in the market. The ACCC has released a draft report proposing to publish information that

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will improve transparency about the market impact of the actions of transmission companies.7 The ACCCs draft report sets out two proposed measures of the impact of transmission constraints on market outcomes. These measures are the Marginal constraint cost (MCC) and the Total constraint cost (TCC) measures. The MCC measure is based on the concept that the marginal value produced by the market operators dispatch engine represents the amount by which the total energy cost would be reduced if a particular constraint was relaxed by a small amount. The TCC considers the market impact of all transmission constraints, based on the cost of being forced to deviate from the least cost (unconstrained) dispatch outcome. Constraints on the transmission network can have a varied effect on the dispatch and pricing in the market. Transmission companies, in turn can have a varied effect on the constraints that occur in the network. Hence, the ACCC is also proposing to publish information regarding the nature of the constraints that occur. Some of the information that the ACCC expects to publish on the nature of constraints includes the frequency of constraints that occurred in each region and across the interconnectors the frequency of system normal constraints, planned outage constraints and non-planned outage constraints in each region and across the interconnectors a break down of those constraint into stability, voltage and thermal constraints; and a break down of the stability, voltage and thermal constraints by load levels.

Examples of some of these measures are outlined in the figures below.

Figure 3 Frequency of Intra-regional constraints
140

120

100

F req u en cy o f co n strain ts

80

60

40

20

0 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04

SA

VIC

SNOW Y

NSW

QLD

TAS

Statement of principles for the regulation of transmission revenues, Market impact transparency measures, Draft decision, ACCC, July 2004

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Figure 4
200 180

Stability, voltage and thermal constraints by load level

160

F r e q u e n c yo fc o n s tr a in ts

140

120

100

80

60

40

20

0
00 10 01 10 00 20 01 20 00 30 01 30 00 40 01 40 00 50 01 50 00 60 01 60 00 70 01 70 00 80 01 80 00 90 01 90 0 00 10 1 00 10 -

00 10 1 1 00 11

00 20 1 1 00 12

00 30 1 1 00 13

00 40 1 1 00 14

00 50 1

Load bands (M W )
Voltage
Stability
Thermal

The ACCCs proposed transparency measures make available the information which will indicate what the cost to the market is of a transmission companys behaviour. It is hoped that this information will influence the transmission company to minimise the impact and cost of constraints on its network. The ACCC proposes to release a report each quarter. This report will include the outcomes of the MCC and TCC outage measures, as well as the information provided by transmission companies on the nature of constraints. Prior to the ACCC being able to develop an economic incentive using the measure it will need to understand which constraints are within the control of the transmission businesses and which are beyond their control. It is not in a position at this stage to comment on the form of the economic incentive it will implement using these measures. It expects this to occur once the effects of the information from the transparency measures are observed. Market transmission companies Moving away from the regulated world I would like to discuss the effect that market transmission companies have had in the national electricity market. As mentioned earlier, market transmission companies are limited to building interconnectors between regions because they earn their revenue through arbitraging price differentials. The national electricity code allows for market transmission companies to operate in the national electricity market, but also allows for such transmission links to be converted to regulated status, after they have been built. It was not clear at the time of market commencement whether the transmission businesses, whose prime responsibilities were to meet state reliability requirements, would consider constructing interconnectors. Market investments were encouraged to address the low level of interconnection between the states. Unfortunately, the code arrangements governing the co-existence of regulated and market transmission investments were not well structured. Questions remained about

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whether regulated businesses should be required to make investments which would primarily benefit market transmission. Conversely the presence of a market transmission link can deter regulated transmission investments from going ahead, and lead to sub optimal investment outcomes from a whole of market perspective. In light of these unanswered questions it was thought that market transmission should have a right to convert to regulated transmission. Two market transmission companies have operated in the Australian market, one of which has converted to regulated status and the other of which is in the process of converting. While the NEM has been successful in sending transmission investment signals, it would seem that it may not have been as successful in establishing a regime whereby regulated and unregulated investments could co-exist. These problems were brought to the fore when the South Australian and New South Wales governments sought to develop an interconnector (SNI) between the two states, at the same time as a market link (Murraylink) was being built and operated. In this case, it was found that the code provisions relating to the interactions between market and regulated transmission companies were inadequate. The code did not provide guidance on how to take network externalities into account, and hence while market benefits could have been maximised using a co-operative approach, the proponents of the regulated and market interconnectors were unable to achieve this. The approval process for SNI has been the subject of two appeals and a third appeal has recently been withdrawn, as the main proponent of SNI has decided not to go ahead with its development. Overall the framework to allow market transmission links in the more general regulated transmission framework of the national electricity market has not worked well, and while new market transmission companies will still be able to enter the national electricity market, proposed rule changes are likely to prevent subsequent conversion to regulated status. Conclusion The ACCC has operated as the transmission revenue regulator in the Australian national electricity market since 1999. The regulatory regime involves a revenue cap applied to the transmission companies for a regulatory period of 5 years. The revenue cap framework included some basic measures of service standards and some fairly simple efficiency incentives. As a separate component of the regulatory framework, transmission companies applied a regulatory test to their planned capital expenditures, but the links between the regulatory test and the revenue cap decisions of the ACCC were not explicit. Capital expenditures were subject to an ex-post assessment by the ACCC, and use of the regulatory test minimised the threat of optimisation in the revenue cap decisions of the ACCC. However, experience of the first 5 years as regulator has led the ACCC to seek modifications to the regulatory regime. The key modifications, notably the move to an ex-ante capital expenditure assessment, target the incentives facing the transmission companies, as well as minimising regulatory risk and increasing the transparency of the regulated outcomes.

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The Australian national electricity market is currently undergoing some major governance reviews, and the new arrangements are expected to be implemented in the next 6 months or so. However, while these changes will impact on the work of the ACCC, they should not dramatically impact upon transmission investment outcomes. Under the new governance arrangements, the Australian Energy Regulator will continue the ACCCs work in consistently applying a transparent regulatory framework, achieving a balance between the needs of the transmission companies, and their customers.

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