1. Andrew Reeves, Chairman Asia-Pacific Partnership on Clean Development and Climate: Energy Regulatory and Market Development Forum 4 November 2010

2. Overview Market Governance Gas and electricity market development
Policy maker / regulator / operator separation
Gas and electricity market development
NEM / SWIS
Emerging gas market
Coal seam gas
Energy price drivers
Economic regulation in Australia
Recent decisions
Retail price impacts

3. Market governance

4. Electricity regulatory structure
QLD
NSW
ACT
Vic
Tas SA WA NT
Licensing
Office of
Energy
Minister
for
/ IPART
ICRC
ESCV
OTTER
ESCOSA
ERA UC
Retail Pricing
IPART
DOI
/ GPOC
Non-price
Retail
Australian Energy Regulator (AER)
Distribution
Transmission
Wholesale
Competition
Regulation
Australian Competition and Consumer Commission (ACCC)

5. Overview of AER’s roles in energy
Wholesale gas & electricity markets
Transmission
networks & pipelines
Distribution
Networks for gas/electricity
Retail
& other distribution
We monitor wholesale markets and enforce rules
We regulate revenues of transmission businesses
We regulate revenues of distribution businesses
We will regulate non-price retail activities

6. Australian electricity snapshot
Population ~ 22.2 million
65% in capital cities
90% on east coast
Electricity
energy TWh pa
peak ,000MW
installed 50,200MW
Northern Territory
Demand 300
Capacity 1000
Queensland
Demand 8,900
Capacity 12,050
Western Australia
Demand 4,000
Capacity 5,000
South Australia
Demand
Capacity 3,850
New South Wales
Demand 14,300
Capacity 15,900
Victoria
Demand
10, 450
Capacity
10, 000
Snowy*
Tasmania
Demand 1,750 Capacity 2,400
* 3676MW at Snowy gen split between NSW & VIC

7. National electricity market
fully interconnected AC power system
covers 4500km
includes 3 DC links
regional pricing model
5 regions
one market/system operator

8. Generation mix

9. Ownership of generation

10. NEM market design

11. South Australia - 7 February 2009

12. Wholesale electricity quarterly prices

13. Futures prices - electricity

14. WA electricity market

15. NT electricity

16. Gas market development

17. New gas transmission

18. Wholesale gas prices Market average price for Sep-Oct Price $/GJ
Victorian Gas Market (weighted average daily price)
$2.11
STTM – Sydney Hub (ex ante)
$2.27
STTM – Sydney Hub (ex post)
$2.82*
STTM – Adelaide Hub (ex ante)
$3.11
STTM – Adelaide Hub (ex post)
$3.20
*Excludes 8 October 2010 event

19. Coal seam gas (CSG)
NSW
QLD

20. WA and NT gas

21. Reporting on market outcomes
Weekly report
Now produced for electricity and gas
market dynamics and forecasts
Longer-term statistics - website
Annual state of the market report
– market snapshot

22. Energy price drivers Economic regulatory regime
Factors impacting on network prices
Recent network revenue determinations
Retail price outcomes

23. Network regulation - Building blocks
RAB
Return on capital
Allowable
revenue
Depreciation
Tax
Reference tariffs
Operating costs ÷
Demand forecasts

24. Factors influencing network charges
Capital expenditure
Ageing asset replacement
Demand Increase
New connections
Reliability and service standards
Operating expenditure
increasing asset base
increasing input costs (labour and materials)
Cost of Capital (WACC)
Bushfire safety standards

25. Network investment and replacement$-
$10,000,000
$20,000,000
$30,000,000
$40,000,000
1940
1950
1960
1970
1980
1990
2000
2010
2020
2030
2040
2050
INITIAL + REPLACEMENT CAPEX ($pa - real dollars)
Initial investment
Indicative replacement investment

26. Distributors revenue breakdown
NSW only

27. Distribution regulatory asset bases

28. Distributor capex

29. Distributor opex

30. Electricity distribution revenue

31. What influences retail price
Wholesale energy costs ~ 31 to 45% for electricity
Network charges
Transmission ~ 10 %
Distribution ~ 40 to 50%
Retailer costs ~ 4 to 15%
Regulation of retail tariffs by state regulators (except Victoria)
Standing offers Vs market offers

32. Retail electricity prices
Historically, Australia has had low retail electricity prices

33. Retail electricity prices
Prices are now rising and are expected to rise further

34. Other development issues
New low carbon generation
Demand management
Smart Grid trial
Smart meter rollout

35. Questions ?