OVERVIEW OF THE VICTORIAN SMART
METER PROGRAM
A MANDATED SMART METER ROLL-‐OUT
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This report has been completed as part of the New Zealand Smart Grid Forum’s Workstream D – Facilitating the Smart Grid Forum Vision. Report completed by Katherine Moore.
REPORT SUMMARY
The Smart Grid Forum has been investigating potential challenges to a market-‐led model for implementing smart grid technologies. An initial part of this work included a review of market-‐led investments in smart metering and ripple control upgrades in New Zealand to identify possible coordination challenges. The Forum has discussed and published a report: Learnings from Market Investments in Ripple Control and Smart Meters. This paper provides an overview of a mandated roll out of smart meters for comparison; the Smart Meter Program in Victoria, Australia. Its main purpose is to review the various reports on the Victorian Smart Grid Program to identify lessons that might apply to a mandated roll-‐out of smart grid technologies.
The Victoria Smart Meter Program has been widely reviewed and criticised. Even as the program was at its very beginning the Victorian Auditor-‐General’s Office (VAGO) pointed to failures in project governance, customer engagement and economic analysis of the costs and benefits. VAGO’s audit, cost blow-‐outs, customer concerns led to a government review of the program and subsequent changes to the program. As the program has progressed, there have been further concerns highlighted by the Productivity Commission. The main issues highlighted by the reviews are summarised below.
Customer implications and engagement
• There was insufficient engagement and consultation with customers
• Customers have faced (increasing) costs before they can take advantage of the benefits • Customers did not have choice in meter service.
Cost concerns
• Cost estimates have risen through the program from an initial estimate of AUS$1.6 billion to over AUS$2 billion.
• Incentives for distributors to contain costs seemed to have been weak • Changes and delays to the program have increased costs
• Flaws in cost–benefit analysis
• Lack of competition in metering services and misalignment of risks and rewards.
CONTENTS
1. Introduction ... 2
2. Background to the Victoria smart meter roll-‐out ... 2
3. HIgh-‐Level Comparison with New Zealand’s SMart MEter roll out ... 4
4. The Victoria smart meter roll-‐out ... 5
5. National and other state smart metering ... 8
The national AMI program ... 8
Other State developments ... 9
6. Summary of issues ... 10
1. INTRODUCTION
The Smart Grid Forum has been investigating potential challenges to a market-‐led model for implementing smart grid technologies. An initial part of this work included a review of market-‐led investments in smart metering and ripple control upgrades in New Zealand to identify possible coordination challenges. The Forum has discussed and published a report: Learnings from Market Investments in Ripple Control and Smart Meters. This paper provides an overview of a mandated roll out of smart meters for comparison; the Smart Meter Program in Victoria, Australia.
The rest of this report provides:
-‐ Background to the Victoria electricity market and the Smart Meter Program -‐ A high-‐level comparison of the New Zealand and Victorian models
-‐ An overview of the Victoria smart meter roll-‐out and the reviews and reports by date -‐ An overview of national and other Australian state smart meter developments
-‐ A summary of the Victoria Smart Meter Program issues identified by regulators, advisory bodies or consultants.
This paper draws on other reports and reviews of the Victorian Smart Meter Program to provide an overview of the issues or lessons from the mandated program. There are different ways to mandate and run a smart meter roll-‐out; some of the issues associated with the Victorian programme may not apply to other mandated programmes.
2. BACKGROUND TO THE VICTORIA SMART METER ROLL-‐OUT
Victoria was the first jurisdiction in Australia to consider a state-‐wide rollout of smart meters.
In New Zealand, the switch to smart meters was largely driven by electricity retailers seeking cost or service advantages and customers could opt out. In comparison, the smart meter roll-‐out in Victoria was mandated by the state government.
In 2004, the Victorian Essential Service Commission (ESC), mandated the rollout of manually read smart meters through Victoria, termed the 'Interval Meter Rollout' (IMRO) program. However, the Victorian Department of Infrastructure (DoI) and the electricity supply industry had the view that developments in metering technology meant that the functionalities of the IMRO could potentially be expanded to produce more overall benefits. Subsequently in 2005, DoI and the electricity supply industry commissioned a cost-‐benefit study to examine the net benefits for adding advanced functionality to the IMRO mandate. This became known as the Advanced Interval Metering Rollout study.
As a result of this study, the Parliament passed an amendment to the Electricity Industry Act in August 2006 that gave Government the authority to make ‘Orders-‐in-‐Council’ (OIC)—which are enforceable orders by the executive branch of government—to establish a range of requirements for the deployment of Advanced Metering Infrastructure (AMI).
3 | P a g e In August 2007 the government issued an OIC, setting up the initial regulatory framework for cost recovery and installation targets for Victoria’s five privately-‐owned distributors.
The OIC established a regulated cost recovery framework to provide certainty for electricity distributors to commit to AMI deployment expenditure through to December 2013. The OIC required each distributor to submit budget and pricing information to the Australian Energy Regulator (AER).
A further OIC in November 2007 mandated the initial minimum specifications for functionality, performance and service levels of the smart meters.
Department of Primary Industries (DPI) coordinated technology trials to identify communication systems that would suit the AMI project objectives and produced a technology trial report in November 2007.
DPI transferred the AMI project governance to the Victorian electricity industry in October 2007 through an Industry Steering Committee with an independent chairperson. This steering committee initially coordinated implementation and its members included representatives of electricity distribution and retail businesses, as well as consumer advocacy groups and relevant energy policy and regulatory agencies.
The Government did not impose a particular technology for the smart meters installed, although it did prescribe a relatively high level of minimum functionality of the meters and standards for associated service
G
OVERNMENT
,
REGULATORS AND ADVISORY BODIES
Various government, regulatory and advisory bodies operate in the electricity market both at the Federal and State level.
The Council of Australian Governments (COAG) is the peak intergovernmental forum in Australia. The role of COAG is to promote policy reforms that are of national significance, or which need co-‐ordinated action by all Australian governments. The COAG Energy Council was set up by COAG to provide a forum for collaboration on developing an integrated and coherent national energy policy. The COAG Energy Council superseded the Standing Council on Energy and Resources which superseded the Ministerial Council on Energy (MCE).
The Australian Energy Regulator (AER) regulates energy markets and networks under National Energy Market (NEM) legislation and rules. (The NEM interconnects five regional market jurisdictions (Queensland, New South Wales, Victoria, South Australia and Tasmania)).
Australian Energy Market Commission (AEMC) is the rule maker for Australian electricity and gas markets. It makes and amends the National Electricity Rules (which include the regulation of distributors), National Gas Rules and National Energy Retail Rules. It also provides market development advice to governments. The Essential Services Commission (ESC) is the independent regulator of essential services in Victoria. It regulates the retail energy industry in Victoria and issues energy distribution and retail licenses.
The Victorian Auditor-‐General’s Office (VAGO). The Victorian Auditor-‐General is an independent officer of the Victorian Parliament, appointed to examine the management of resources within the public sector on behalf of Parliament and Victorians.
The Productivity Commission is an advisory body providing independent advice and information to governments. The Commission is an agency of the Australian Government.
levels. These meters must conform to minimum functionality and performance levels for the AMI systems across the following elements:
• Meter configurations
• Remote and local reading of meters • Supply disconnect and reconnect • Time clock synchronisation • Load control
• Meter loss of supply detection and outage detection • Quality of supply and other event recording
• Supply capacity control
• Interface to the home area network (HAN).
The Government expected that the rollout would lower electricity prices for consumers, increase retail competition, improve service quality and increase the efficiency of electricity suppliers. However, the rollout experienced problems.
3. HIGH-‐LEVEL COMPARISON WITH NEW ZEALAND’S SMART METER ROLL OUT
The Victorian Smart Meter Program is an example of a mandated roll out. In New Zealand, the switch to smart meters was driven by retailers seeking cost efficiencies and competitive advantage in the retail electricity market. Both Jurisdictions have seen similar technology smart meters installed at the majority of electricity consumers’ premises over broadly similar timeframes.
The two approaches have differences in how service levels and functionality are determined, in the way the costs are handled and passed through to customers, and who bears the cost and technology risks. These differences are summarised below.
Victoria New Zealand
Framework overview The distributors are charged with installing smart meters at all customer premises.
There is no mandate to install smart meters. Electricity retailers can choose to switch to smart meters and whether or not the customer can opt out. Service level and
functionality
The Government prescribed a standard minimum service level and functionality.
Individual retailers determined the required services and service levels to be received (eg data frequency, file format, event services.)
Costs Costs passed directly to consumer as a line item on their bill. The costs are reviewed by the AER annually and range from AUS$109 to $226 for 2015 (per meter per annum).
Costs are generally not identified on customers bill. Retailers have signed 8 to 15 year service agreements with metering service providers with annual fees of around $60 to $120 per year. Risks The risks of meter deployment and
system cost overruns and technology risk are borne by customers. The distributors have already recovered portions of the cost overruns from customers, and will continue to recover the costs.
The metering service provider or retailer, depending on their agreement, carries the risks of meter deployment and system cost overruns and the risks that their technology is superseded, or that their meter is switched out by a new retailer.
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4. THE VICTORIA SMART METER ROLL-‐OUT
The smart meter roll-‐out began in late 2009. Distributors were mandated to install smart meters at all homes and businesses by Dec 2013.
Two major types of smart metering systems have been deployed by the distributors. The first is based on RF Mesh technology created by Silver Springs Networks, and the second is WiMAX based on technology created by GridNet technology is being deployed by SP AusNet, while the remaining four distributors are using RF Mesh.
The roll-‐out of smart meters in Victoria is now effectively complete with almost 2.8 million meters installed across the state. There have been a number of changes to the programme prompted by customer concerns, cost overruns.
This section steps through the reviews and decisions affecting the roll-‐out. More detailed information and access to reports is given on the Smart Meters in Victoria website, Department of Economic Development, Jobs, Transport and Resources, Victoria http://www.smartmeters.vic.gov.au/home
NOV 2009 VICTORIAN OFFICE OF THE AUDITOR GENERAL (VAGO)
AUDIT
At the beginning of the roll-‐out, an audit by VAGO raised concerns and made a series of recommendations to change the programme. The concerns were in the following areas:
• project governance
• the economic merits of the roll out
• implementation risks including technology risks • consumer implications and engagement.
2010 COST-‐BENEFIT REPORTS
The Victorian Government, through the Department of Primary Industries, commissioned three assessments to update previous studies into the costs and benefits of the AMI Program. These three assessments are consolidated in a report by Oakley Greenwood, Benefits and Costs of the Victoria AMI Program, Aug 2010. This concluded that there was a sound economic basis for the AMI Program.
2010 MORATORIUM ON TIME OF USE PRICING
In March 2010 the Victorian Government arranged a moratorium by Victorian electricity distribution businesses on the introduction of time of use pricing, as enabled by AMI. The moratorium was introduced in response to community concern about the potential distributional impacts of time of use pricing.
2011 REVIEW
In June 2011, the Victorian Government announced a review by the Department of Treasury and Finance of the AMI programme, largely in response to the VAGO 2009 audit, and increasing customer concerns. The Review found that the most responsible option was to continue the meter rollout, with improvements aimed at bringing greater benefits to households.
One part of the review was an independent cost-‐benefit analysis by Deloitte, Advanced Metering
Infrastructure Customer Impacts Study , 2011 which, although estimating the program might have a net cost to consumers, recommended that, at the current stage of the program’s life, the maximum benefit would be delivered by continuing the rollout. The review’s other main findings were:
• smart meters are safe and fall well within the requirements for electromagnetic and radiofrequency emissions
• consumers can benefit from an orderly introduction of flexible pricing, including the continuation of flat rates
• greater customer engagement is required to better explain smart meters and their operation.
The Victorian Government made the following main changes to the AMI Program, now rebranded the Smart Meter Program:
• subsidising in-‐home displays to help households control their energy bills, with some basic in-‐home displays available at low cost by mid-‐2012
• progressively offering remote connections for Victorians moving house from 1 Jan 2012, saving customers around $15, or more than $100 after hours
• extending the delay on the introduction of flexible pricing until at least 2013, to allow time for consumers to learn more about their options
• ensuring Victorian consumers can choose to remain on flat rates even when flexible pricing is introduced
• toughening the regulation of smart meter cost recovery by distribution businesses through removing the automatic allowance for cost overruns of 10 to 20 per cent
• providing greater oversight by government and giving consumer and welfare groups a stronger voice in the smart meter rollout process through a new Ministerial Advisory Council.
2011
AER DETERMINATION
ON SMART METER CHARGES FOR 2012-‐15
The Australian Energy Regulator issued its final determination on applications from the Victorian electricity distribution businesses for ‘smart meter’ budgets and forecast charges over the period 2012 to 2015. The estimated charges ranged from around AUS$90 to AUS$220 per year. The AER expected at the time that the distributors would spend over AUS$2 billion combined from 2009 to 2015, compared to a 2010 estimate of AUS$1. 6 billion. SP AusNet’s application and the AER determination was particularly controversial, the costs of SP AusNet’s WiMAX technology had overrun significantly. The AER refused AUS$107 million of SP AusNet’s application.
The AER considered SP AusNet should have reconsidered its decision to proceed with its AMI rollout using WiMAX communications technology. Following a legal challenge to this decision, by SP AusNet, the Australian Competition Tribunal required the AER to revisit certain parts of its decision in April 2012.
The Tribunal agreed with the AER that a reasonable business in SP AusNet’s circumstances would have undertaken a thorough reconsideration of its communications solution when it realised that its original cost estimates had blown out. However, the Tribunal required the AER to examine the cost of changing to another technology, including whether switching costs would have been incurred if SP AusNet had changed
technology. The amount of funds under consideration for the communications technology amounted to $72.2m.
7 | P a g e The AER made its revised determination on 4 February 2013. The AER found that a reasonable business in SP AusNet’s circumstances would have switched communications technology in early 2011. However, the AER found that the allowance it originally approved for 2011 would have been more than sufficient to cover the costs of switching to the alternative technology in that year. The AER considered customers should not pay more for cost overruns because of SP AusNet’s choice of communications technology. The AER denied SP AusNet the $72.2m it had sought.
APRIL 2013
PRODUCTIVITY COMMISSION REPORT
The Productivity Commission’s report, Electricity Network Regulatory Frameworks, Productivity Commission
Inquiry Report, April 2013, covered wide issues around network regulation, including smart meter issues and
was critical of the Victorian Smart Meter program.
By this time there had been a consumer backlash against smart meters with consumers concerned about privacy, safety, costs, the lack of choice, and that costs were increasing. The report noted1 issues around:
• Consumer engagement
• The impact of the moratorium on time of use tariffs on efficiency gains • Excessive initial optimism and high costs
• Incentives for distributors to contain costs seemed to have been weak • Flaws in cost–benefit analysis
DEC 2014
New regulations announced in December 2014 require electricity distributors to continue to install smart meters after the end of 2013.
FUTURE: UPDATED VAGO REPORT EXPECTED
Between 2009 and 2014, Victoria’s electricity distribution businesses have installed roughly 2.8 million smart meters at an estimated cost of $2 billion. VAGO is currently preparing an audit to assess the extent to which deficiencies in the AMI program have been addressed, and whether benefits for consumers are being realised. The audit will assess whether the Department of State Development, Business and Innovation:
• has effectively addressed recommendations from VAGO’s Towards a ‘smart grid’—the rollout of Advanced Metering Infrastructure report
• can demonstrate that the AMI program is delivering expected consumer benefits and is set-‐up to maximise longer-‐term benefits.
The report is expected to be tabled in June 2015.
FUTURE: CHANGES TO THE NATIONAL REGULATORY FRAMEWORK FOR METERING
The AEMC is currently working on rule changes (AEMC consultation paper on rule change) to introduce a national regulatory framework for competitive metering. (See section below).
1 Volume 2, box 10.2 Productivity Commission, Electricity Network Regulatory Frameworks, Productivity Commission Inquiry Report, April 2013
5. NATIONAL AND OTHER STATE SMART METERING
THE NATIONAL AMI PROGRAM
In April 2007, the Council of Australian Governments (COAG) committed to a national roll-‐out of electricity smart meters to areas where benefits could be demonstrated to outweigh costs. These areas were chosen from a cost-‐benefit analysis which looked at different markets in each state and territory and the
circumstances of different groups of consumers. The national AMI cost-‐benefit report was released in mid-‐ 2008 and found a positive case for Victoria (and for most other jurisdictions).
The National Smart Metering Program (NSMP2) was established by the Ministerial Council on Energy (MCE) to develop a framework for an efficient, flexible and open-‐access smart metering infrastructure across the national electricity market (NEM).
From mid-‐2008, the MCE worked with industry stakeholders (including electricity retailers, distribution businesses, metering providers, consumer organisations, market operators and jurisdictions) to deliver:
• the Smart Metering Infrastructure (SMI) Minimum Functionality Specification
• proposed changes to the National Electricity Rules to support a mandated rollout of smart metering • draft issue change forms for changes to the NEM Procedures to support the provision of smart
metering services
• an evaluation of home area network (HAN) interface standards
• advice to the MCE in relation to in home displays guidelines and direct load control in priority appliance guidelines
• pilots and trials status reports for 2008, 2OO9,2O1O
• business, consumer and technology reporting frameworks to support the consistent reporting and sharing of information from pilots and trials
• the smart metering future pilots and trials report
• a national testing framework for the testing of changes to NEM systems to support smart metering services.
In April 2011, the National Stakeholder Steering Committee (NSSC) for the National Smart Metering Program confirmed completion of the majority of agreed NSMP deliverables, handover of remaining deliverables to responsible parties, and the appropriateness of formally closing the NSSC.
In August 2011, the Australian Energy Market Operator (AEMO) and the electricity industry's Information Exchange Committee put on hold the ongoing NSMP work that had been transferred to it from the NSSC. This work, the development of NEM procedures, could not proceed efficiently until key policy issues were resolved. Despite COAG’s commitment to the development of a national smart meter legislative and regulatory
framework, other jurisdictions have been more cautious than Victoria with its implementation, and the AEMC is working on rule changes to enable contestable metering service, partly as a result of the Victoria experience.
CHANGES TO THE NATIONAL REGULATORY FRAMEWORK
The Ministerial Council on Energy (which was superseded by the Standing Council on Energy and Resources (SCER)) commissioned the Australian Energy Market Commission (AEMC) in March 2011 to undertake a review
9 | P a g e of the market and regulatory arrangements across the electricity supply chain to facilitate efficient investment in, operation and use of DSP in the NEM3.
In October 2007 the Australian Energy Market Commission (AEMC) initiated a three-‐stage review of whether the demand-‐side of the National Electricity Market (NEM) is participating effectively and efficiently in the market.
The AEMC presented its final Power of Choice recommendations (Nov 2012) to the Standing Council on Energy and Resources (SCER), now known as the COAG Energy Council. One of these recommendations was to make rule changes to introduce a national regulatory framework for competitive metering; this will enable retailers and metering providers to contest metering service provision.
The AEMC is currently working on the rule changes (AEMC consultation paper on rule change).
OTHER STATE DEVELOPMENTS
NEW SOUTH WALES
New South Wales has recently announced a market-‐led roll out policy under which retailers and metering providers will be able to offer customers smart meters. This followed a 2 year consultation and the New South Wales
As stated in the announcement from the Minister of Energy and Resources: ‘The policy follows the lessons learned from the troubled rollout of smart meters in Victoria….Not only were Victorian customers not given a choice of meters, they were also charged the upfront cost of the meter and its installation, a decision which is still costing them.’
QUEENSLAND
Queensland has recently published a Government Discussion Paper: Powering Queensland’s Future. The paper rules out a mandated approach to smart meter roll-‐out:
‘There are, broadly speaking, two approaches to the rollout of advanced metering technology. One is a mandated, distributor-‐led rollout. This approach was taken in Victoria where it was criticised as not being based on a clear economic case and not well communicated to customers. The alternative is a customer-‐driven rollout, where a range of different service providers can compete to offer customers advanced metering services and associated product choices. Customers can choose to adopt the technology based on their assessment of the benefits. Based on the Victorian experience, the Queensland Government has ruled out a mandated rollout of advanced meters in Queensland and will support the customer-‐driven approach.’
SOUTH AUSTRALIA
South Australian Government issued a consultation paper in January 2014, but has said it will decide its policy after the AEMC determination.
3 http://www.aemc.gov.au/Media/docs/MCE%20Terms%20of%20Reference-‐35e6904a-‐e39d-‐4348-‐8ad5-‐ 1a7970af354d-‐0.pdf
WESTERN AUSTRALIA
The Economic Regulation Authority (WA) approved stage government-‐owned company Westpower installing smart meters but budget cuts have stalled installation. A recent review by the Electricity Supply Association of Australia has recommended private operators are given the chance to install the meters.
TASMANIA
Previous analysis indicated that a mandated roll out of smart meters in Tasmania would come at a higher cost than the benefits it would deliver. A recent Energy Strategy Issues Paper from the Department of State Growth stated that ’with technological developments and changing consumer preferences and responsiveness to price signals, smart meters to support tariff reform could become viable.’
6. SUMMARY OF ISSUES
The Victoria Smart Meter Program has been widely reviewed and criticised. Even as the program was at its very beginning the Victorian Auditor-‐General’s Office (VAGO) pointed to failures in project governance, customer engagement and economic analysis of the costs and benefits. VAGO’s audit, cost blow-‐outs, customer concerns led to a government review of the program and subsequent changes to the program. As the program has progressed, there have been further concerns highlighted by the Productivity Commission. Victoria continued with the program, and it is now all but complete. In the meantime, other Australian states have been more cautious. Recently New South Wales Minister for Energy Resources referred to the ‘troubled roll-‐out of smart meters in Victoria’ and New South Wales, with Queensland and potentially other states are now favouring a market-‐led roll-‐out.
The problems have focused on two key areas: • customer implications and engagement • cost concerns.
CONSUMER IMPLICATIONS AND ENGAGEMENT
The Victorian Auditor-‐General’s Office questioned the adequacy of consultation with consumers in the process leading up to the rollout. After the rollout was in progress, the review by Deloitte) and a broader Government review emphasised the need for customer engagement so that people were aware of the benefits of the meters. In response, the Government announced it was giving consumer and welfare groups a voice in the smart meter rollout through a new Ministerial Advisory Council, as well as undertaking other measures (such as a smart meter website and a price comparison web portal).
There has been a backlash amongst consumers and media triggered by safety, privacy and cost concerns. Under the mandated arrangement, customers did not have a choice, were faced with paying for the smart meters before they could take advantage of the benefits of smart meters, and have seen costs rise from an estimated $AUS 1.6 billion to over $2 billion.
The moratorium on ‘time of use’ pricing, whilst introduced in response to concerns about the impacts on consumers, contributed to delays in consumers realising the benefits.
11 | P a g e about the impacts on consumers, particularly vulnerable consumers. In the view of the Productivity
Commission, the moratorium added further delays to the realisation of benefits from the smart meter rollout. Following analysis of the customer impacts of time-‐based pricing, the Government has since decided that flexible pricing would be encouraged on a voluntary basis for residential consumers.
COST CONCERNS
Despite initial optimism that a smart meter rollout would produce net benefits, the Deloitte analysis found that the rollout would be likely to incur a net cost over its lifetime. Nevertheless, given that a large share of the investments was sunk, that study found that a continued rollout would pass a cost–benefit test. The Deloitte study was preceded by many other studies looking at aspects of the project (Futura, EMCa and Strata Energy Consulting 2010; and Oakley Greenwood which summarised the earlier studies), which suggested positive net benefits.
It appears that costs were significantly underestimated (in the view of both VAGO and Deloitte). For example, the Deloitte study found rollout costs of $2.2 billion compared with a 2010 study estimate of $1.6 billion. This is around $800 compared with around $600 per meter based on installing 2.9 million meters at around 2.7 million small customer points.
From 2009 to 2015, the AER estimated that distributors would ultimately spend over $2 billion on the rollout. It also appears that initial benefits were over-‐estimated. For example, Deloitte estimated benefits of just over $2 billion, while the Futura (2009) study estimated $2.6 billion.
From a customer perspective the annual charges for smart meters are significant. These are included as a separate line item on customers’ bills. The 2015 fees approved by the AER are:
• Jemena (northwest suburbs): $226.30 up $32.50
• AusNet Services (eastern suburbs, northeast and eastern Victoria): $205.50 up $45.30 • United Energy (south-‐eastern suburbs and Mornington Peninsula) $154.50 up $12.80 • CitiPower (CBD, inner suburbs): $115.90 down 60c
• Powercor (western suburbs, western and northwest Victoria): $109.40 down $5.90 Studies, commentators, and the distributors have given a number of reasons for the cost blow-‐outs.
• Incentives for distributors to contain costs seemed to have been weak
(VAGO, AER, Productivity Commission) Victorian cost-‐recovery regulations for smart meters (overseen by the AER) effectively took the form of cost pass-‐through. This provides few incentives for cost management. In 2012, the AER approved proposals by the distributors to increase their smart meter charges, noting that the higher charges were attributable to all the distributors spending more than their approved expenditure allowances in 2011. Some distributors spent close to 120 per cent of their approved budget, which was allowed by the Victorian regulation. The Victorian Government decided in late 2011 to tighten its cost recovery regulation, including removing the cost overrun allowance and reversing the onus of proof of prudent expenditures.
• Changes to the Program
Distributors have claimed some increased costs are a result of the program delays and changes following the 2011 government review.
• Flaws in cost–benefit analysis
VAGO was critical of the initial study that prompted the rollout of smart versus ordinary interval meters, arguing that it only considered the incremental costs and benefits, failed to reconsider the overall costs and benefits of a smart meter rollout, and did not consider implementation and technology risks. The Productivity Commission noted that, regardless of the merits of VAGO’s comments, cost–benefit analysis is challenging when it is used to inform a commitment to make a single large indivisible investment (a mandatory universal rollout) and where there are large technical uncertainties (as there were at the time).
The Commission argued that technology risks were not addressed sufficiently. The 2005 cost–benefit study noted the need for technology trials. In 2006, the department administering the project provided advice to Government that a technology trial be conducted, but that the Government should endorse the universal rollout before the results of the trial. VAGO claimed that these decisions introduced ‘significant risks’ to the project, which was compounded by insufficient oversight of the trials, and the failure to adequately use them to inform the subsequent rollout. Since then, distribution businesses throughout the NEM have conducted many trials.
• Lack of competition in metering services and misalignment of risks and rewards
In its report (Volume 2, box 10.3), the Productivity Commission refers to a number of parties who see competition in smart meters as important, in particular for encouraging innovation and economic efficiencies. In the Victorian model, the consumer faces the cost of the meters, including technology risk, but without the choice of meter or service; the distributor, with the major influence on price and to some extent service, has been able to pass through a large portion of cost overruns.
There are different ways to mandate and run a smart meter roll-‐out; some of the issues associated with the Victorian programme may not apply to other mandated programmes, but provide a useful comparison to the issues identified with market-‐led investments in smart metering in New Zealand.
