REVISED ADVICE
JULY 2014
Street light asset value determinations in the NEM
and WEM
Prepared for the Department of State Development
on behalf of the Equipment Energy Efficiency
Committee
Marsden Jacob Associates
Financial & Economic Consultants
ABN 66 663 324 657
ACN 072 233 204
Internet: http://www.marsdenjacob.com.au
E-mail: [email protected]
Melbourne office:
Postal address: Level 3, 683 Burke Road, Camberwell
Victoria 3124 AUSTRALIA
Telephone: +61 3 9882 1600
Facsimile: +61 3 9882 1300
Brisbane office:
Level 14, 127 Creek Street, Brisbane
Queensland, 4000 AUSTRALIA
Telephone: +61 7 3229 7701
Facsimile: +61 7 3229 7944
Perth office:
Level 1, 220 St Georges Terrace, Perth
Western Australia, 6000 AUSTRALIA
Telephone: +61 8 9324 1785
Facsimile: +61 8 9322 7936
Sydney office:
Rod Carr
Telephone: +61 418 765 393
Author:
Lizzie O’Brien, Phil Pickering, Nadja Arold
[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 AER
Prior 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 CONTENTS
Page
Executive summary ............................................................................................................... 1
1.
Introduction .................................................................................................................. 6
2.
National Electricity Rules ............................................................................................... 9
3.
4.
2.1
AER classification ...................................................................................................................... 10
2.2
Prior determinations and changing existing classifications ......................................................... 14
2.3
Frameworks and Approach paper ...............................................................................................15
2.4
AER Guidelines ...........................................................................................................................15
2.5
Company policy ..........................................................................................................................15
Key issues for street lighting in the NEM ....................................................................... 17
3.1
National Electricity Rules ............................................................................................................ 17
3.2
Competition issues .................................................................................................................... 21
3.3
Residual asset values ................................................................................................................. 25
3.4
Financing non-standard assets................................................................................................... 30
3.5
Information availability .............................................................................................................. 32
Western Australia and Northern Territory ..................................................................... 35
4.1
Western Australia .......................................................................................................................35
4.2
Northern Territory ..................................................................................................................... 39
Appendix 1: Draft Rule Change Proposal .............................................................................. 42
Appendix 2: Factors which facilitate the uptake of efficient street lights ................................ 48
Appendix 3: Upcoming regulatory determination processes .................................................. 50
Executive summary
In 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 services
Neither 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
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.
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Advice on street lighting asset value determination in the NEM and WEM
1.
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.
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 proposal
As 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
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.
4
Clause 6.2.5(b) of the National Electricity Rules
5
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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Advice on street lighting asset value determination in the NEM and WEM
2.
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
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 services
South 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 issues
Marsden 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
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Advice on street lighting asset value determination in the NEM and WEM
3.
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 caseby-case basis is not possible based on the level of information published by the AER.

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
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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4.
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.

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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5.
1. Introduction
Marsden 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
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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been declared and as such the street lighting services provided by Horizon Power are not
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 nonreference 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.
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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Scope of current study
Building on the previous investigations, the advice provided by Marsden Jacob covers the
following:

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 Rules
In 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 classification
The 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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10.
Figure 1: Classification of distribution services
Classification
Description
Regulatory treatment
Direct
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.
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.
Standard
control
service
Alternative
control
service
The costs associated with these
services are shared by all
customers via their regular
electricity bill.
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
17
AER (November 2008) Final Frameworks and Approach Paper – ETSA Utilities 2010 to 2015, p. viii
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Association of SA) and Transport SA indicated a preference for these service to continue to be
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 paper
In 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 Guidelines
The 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 policy
Where 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);
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 additional financing arrangements that might be extended to customers over and above
the standard regulated prices; or

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 Rules
In 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 –
(a) price, quality, safety, reliability and security of supply of electricity; and
(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:
(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) the potential financial constraints faced by users and whether the control mechanism
inhibits the most economically efficient outcome for users; and
(6) any other relevant factor.
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 issues
Some 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.
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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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.
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.
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.
Department of Manufacturing, Innovation, Trade, Resources and Energy
Advice on street lighting asset value determination in the NEM and WEM
23.
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:
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
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.
Department of Manufacturing, Innovation, Trade, Resources and Energy
Advice on street lighting asset value determination in the NEM and WEM
24.
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
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 values
When 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
31
As evidenced in AER Determinations for Victorian, New South Wales, and Queensland.
Department of Manufacturing, Innovation, Trade, Resources and Energy
Advice on street lighting asset value determination in the NEM and WEM
25.
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
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.
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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26.
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
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.
Department of Manufacturing, Innovation, Trade, Resources and Energy
Advice on street lighting asset value determination in the NEM and WEM
27.
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.
34
PwC (2011) Barriers to efficient streetlighting, prepared for the Equipment Energy Efficiency Committee, p. 3.
Department of Manufacturing, Innovation, Trade, Resources and Energy
Advice on street lighting asset value determination in the NEM and WEM
28.
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
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.
35
AER (2009) Energy Efficient Street lighting Charges – Victoria, Final Decision, February 2009, p.46.
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
Department of Manufacturing, Innovation, Trade, Resources and Energy
Advice on street lighting asset value determination in the NEM and WEM
29.
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
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-bycase 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 assets
Standard 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 nonstandard 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
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.
40
PwC (2011) Barriers to efficient streetlighting, prepared for the Equipment Energy Efficiency Committee, p. 3.
Department of Manufacturing, Innovation, Trade, Resources and Energy
Advice on street lighting asset value determination in the NEM and WEM
30.
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 nonstandard products.
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
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.
Department of Manufacturing, Innovation, Trade, Resources and Energy
Advice on street lighting asset value determination in the NEM and WEM
31.
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.
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 availability
Previous 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.
Department of Manufacturing, Innovation, Trade, Resources and Energy
Advice on street lighting asset value determination in the NEM and WEM
32.
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
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.
44
Ironbark (July 2011) Draft Streetlight Energy Efficiency Strategy prepared for the Equipment Energy Efficiency
Program, p. 27.
Department of Manufacturing, Innovation, Trade, Resources and Energy
Advice on street lighting asset value determination in the NEM and WEM
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Department of Manufacturing, Innovation, Trade, Resources and Energy
Advice on street lighting asset value determination in the NEM and WEM
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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/electricityaccess/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.
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 2004
56
Clause 10.23 of the Electricity Access Code 2004
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4.2 Northern Territory
In the Northern Territory, the Power and Water Corporation provides street lighting services on
behalf of Councils and Government Departments. The standard service provision includes
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.
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.pdf
61
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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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:
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.
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.
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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
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.
67
Utilities Commission (December 2013) 2014 Network Price Determination: Draft Determination, p. 48.
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
Summary
The 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.
Background
COAG 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 arrangements
In 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.
Issue
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 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 20102015 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 Change
Description 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
(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.
(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:
(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) the potential financial constraints faced by users and whether the control
mechanism inhibits the most economically efficient outcome for users; and
(6) any other relevant factor.
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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 Objective
Before 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 –
(a) price, quality, safety, reliability and security of supply of electricity; and
(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 Rule
Benefits

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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Advice on street lighting asset value determination in the NEM and WEM
47.
Appendix 2: Factors which facilitate the uptake
of efficient street lights
While 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
71
Exceptions may be granted by the Minister upon request.
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businesses to streamline negotiation processes and assist in the uptake of new technologies
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 processes
The 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
NSW/ACT
Qld/SA
Service provider
Form of transitional
arrangement (length of
process)
Regulatory
control
period
Framework and Approach (F&A)
Ausgrid,
Endeavour
Energy, Essential
Energy,
ActewAGL
Placeholder
determination (3 months)
1 Jul 2014 30 Jun 2015
Full determination
(11 months)
1 Jul 2015 30 Jun 2019
30 Jun 2012
Energex, Ergon
Energy, SA Power
Networks
Preliminary determination
with mandatory reopener
1 Jul 2015 30 Jun 2020
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
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Part 2: 30
Nov 2013
n.a.
Part 1: 31
Mar 2013
Part 2: 31 Jan
2014
30 Jun 2013
31 Jul 2013
31 Aug 2013
30 Sep 2013
Nov 2013
30 Apr 2014
1 Jan 2016 30 Dec 2020
31 Dec 2013
31 Jan 2014
28 Feb 2014
31 Mar 2014
May 2014
31 Oct 2014
1 Jul 2017 30 Jun 2022
30 Oct 2013
31 Oct 2014
30 Nov 2014
31 Dec 2014
Feb 2015
31 Jul 2015
(12 months)
Vic
Tas
CitiPower,
Powercor,
Jemena, Jemena,
SP AusNet,
United Energy
Preliminary determination
with mandatory reopener
Aurora Energy
No transitional
arrangements
(12 months)
(15 months)
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)
Jurisdiction
NSW/ACT
Qld/SA
Service provider
Form of transitional
arrangement (length of
process)
Regulatory
control
period
Regulatory Process
Ausgrid,
Endeavour
Energy, Essential
Energy,
ActewAGL
Placeholder
determination (3 months)
1 Jul 2014 30 Jun 2015
n.a
31 Jan 2014
n.a.
n.a.
n.a.
Full determination
(11 months)
1 Jul 2015 30 Jun 2019
30 Nov 2013
31 May 2014
n.a
Jul 2014
Aug 2014
Energex, Ergon
Energy, SA Power
Networks
Preliminary determination
with mandatory reopener
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
Expenditure
forecasting
methodology
submitted
Regulatory
proposal due
Issues paper
published
Public forum
held
Submissions
close
(12 months)
Vic
Tas
CitiPower,
Powercor,
Jemena, Jemena,
SP AusNet,
United Energy
Preliminary determination
with mandatory reopener
Aurora Energy
No transitional
arrangements
(12 months)
(15 months)
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 3: AER 5-year regulatory determination calendar (Regulatory Process 2 of 2)
Jurisdiction
NSW/ACT
Qld/SA
Service provider
Form of transitional
arrangement (length of
process)
Regulatory
control
period
Regulatory Process
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.
30 Apr 2014
Full determination
(11 months)
1 Jul 2015 30 Jun 2019
30 Nov 2014
Dec 2014
Jan 2015
Feb 2015
n.a
30 Apr 2015
Energex, Ergon
Energy, SA Power
Networks
Preliminary determination
with mandatory reopener
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
Draft
decision
published
Predetermin
e conference
held*
Revised
regulatory
proposal
due*
Submissions
close*
Cross
submissions
close*
Final decision
published
(12 months)
Vic
Tas
CitiPower,
Powercor,
Jemena, Jemena,
SP AusNet,
United Energy
Preliminary determination
with mandatory reopener
Aurora Energy
No transitional
arrangements
(12 months)
(15 months)
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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