ATCO’s proposed Network Innovation Scheme

The Issue

The framework for economic regulation of certain gas networks in Western Australia, including ATCO’s West and South-West Gas Distribution Systems, is the National Gas Law and associated National Gas Rules.

The objective of the National Gas Law is to promote efficient investment in, and efficient operation and use of, natural gas services for the long term interests of consumers of natural gas with respect to price, quality, safety, reliability and security of supply of natural gas.

Under the National Gas Rules, ATCO is required to submit access arrangements for its  gas distribution network. An access arrangement sets out the prices, terms and conditions that a network owner can charge its customers to use its infrastructure.

The rapidly evolving Australian energy market is driving the need for greater innovation in both gas and electricity network services provision, including in response to new generation sources and consumers’ changing energy consumption expectations and requirements

In this broader context, Synergies was engaged to develop a Network Innovation Scheme for ATCO for include in its proposed access arrangement for the 2020‑24 regulatory period.

Our proposed Network Innovation Scheme was intended to create financial incentives for ATCO to undertake expenditure on innovative trials and R&D. The reason for the proposed scheme was that such expenditure would not generally satisfy the standard prudency and efficiency tests built into the National Gas Rules because the pay-offs from such expenditure are not certain or easily quantifiable.

The proposed Network Innovation Scheme

The key features of our proposed Network Innovation Scheme were:

• A Network Innovation Scheme objective, which makes explicit that projects must demonstrate the potential for medium to long-term benefits – that is, over timeframes beyond a single regulatory period.
• Strict project eligibility criteria, based on new, novel or original concepts and involving technology or techniques that differ from those previously implemented or used in the Western Australian Energy Market; or facilitates the adoption of new technologies that can expand the existing range of uses for gas and/or the gas network.
• Administrative arrangements, including an indexed annual cap of $1 million, to limit how much ATCO will be able to spend on innovative trials/projects that satisfy the eligibility criteria and to ensure existing gas consumers only pay for approved trials/projects.
  • Any unused scheme amounts would be handed back to customers at the start of the next regulatory period.
• Compliance reporting requirements, including ATCO preparing annual reports on its trials/projects under the scheme, with ERA to conduct ex-post reviews of them to determine their compliance with the project eligibility criteria and scheme objective.

Key findings

In developing the Network Innovation Scheme, Synergies’ key findings were:

• The existing national gas regulatory framework is not designed to provide strong incentives for network innovation, particularly leading-edge technologies associated with potentially major changes in future gas network services provision. This is because it assumes a stable and predictable energy market and no fundamental change in network service provision.
• Evidence from other countries’ economic regulators, including in the UK and US, indicates that the existing Australian national gas regulatory framework will need to evolve to encourage greater network innovation consistent with serving the long term interests of gas consumers.
• Findings from international case studies also generally provide an indication that the operation of a well-designed Network Innovation Scheme for ATCO is likely to support its development and deployment of innovative ideas, learnings and technologies, in turn, ensuring that ATCO maintains a reliable and affordable gas network that provides services that meet its customer’s energy requirements over time.
• The small-scale Network Innovation Scheme proposed by Synergies was designed as a first step to address the weak innovation incentives available under the existing national gas regulatory framework;

Synergies’ expert report can be accessed here.

Further developments

The ERA rejected ATCO’s proposed Network Innovation Scheme arguing that there is no barrier to innovative spending under the current gas regulatory framework, including its standard expenditure prudency and efficiency tests

However, interestingly, in September 2019, the Australian Energy Market Commission (AEMC) approved the introduction of what it called a ‘regulatory sandbox toolkit’ intended to make it easier for energy businesses, including regulated energy networks, to develop and trial innovative approaches to providing energy services to consumers.

The AEMC stated that the regulatory sandbox toolkit is a framework within which participants can trial innovative concepts in the market under relaxed regulatory requirements at a smaller scale, on a time-limited basis and with appropriate safeguards in place.

The AEMC further stated that it is important the regulatory framework supports emerging technologies and business models that have the potential to deliver these benefits to consumers.

ATCO’s submission to the AEMC’s regulatory sandbox process incorporated the Network Innovation Scheme proposal that had been designed by Synergies arguing that:[1]

the design of ATCO’s innovation scheme, and its supporting documentation, could assist the Commission’s examination of how best to facilitate co-ordination of proof-of-concept trials and clarifies the need for regulatory sandbox arrangements in the national gas regulatory framework.

AEMC’s regulatory sandbox  received  overwhelming stakeholder support and will necessitate changes to the national gas and electricity regulatory frameworks. We consider ATCO has made an important contribution to the development of the regulatory sandbox concept and associated evolution of the national energy regulatory framework to facilitate innovation in future gas and electricity network service provision to the benefit of energy consumers.

[1] ATCO (January 2019), p 2 https://www.aemc.gov.au/sites/default/files/2019-02/ATCO.PDF