26 July, 2018
Synergies was engaged by ATCO Gas (ATCO) to prepare an expert report establishing the economic case for an innovation incentive scheme – the Network Innovation Scheme – to be incorporated into its proposed access arrangement to the WA Economic Regulation Authority (ERA) for the 2020 to 2024 regulatory period. The proposed Network Innovation Scheme was intended to be in the long-term interests of WA gas consumers through encouraging ATCO Gas to seek out new and innovative ways of delivering its gas network services in a rapidly changing energy services market. ERA had not previously approved any such incentive schemes under the regulatory framework.
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 key features of our proposed Network Innovation Scheme were:
In developing the Network Innovation Scheme, Synergies’ key findings were:
Synergies’ expert report can be accessed here.
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:
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.
 ATCO (January 2019), p 2 https://www.aemc.gov.au/sites/default/files/2019-02/ATCO.PDF