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April 30, 2018
Report by Brattle Economists Outlines Network Tariff Design Options for Victorian Distribution Networks

Brattle economists have authored a report for The Victorian Distribution Networks that discusses the principles for network tariff design and possible options for developing future network tariffs in competitive retail markets.

The Victorian Distribution Networks, working with stakeholders, are developing ideas on network tariff design that will culminate in a formal proposal for network tariffs for 2021-2025, which will be submitted to the Australian Energy Regulator in mid-2019. The Brattle report builds on the results of the Victorian Distribution Network’s stakeholder engagement processes to date and on ideas developed by stakeholders for the objectives that network tariffs should seek to achieve. The report provides context for these objectives with an overview of recent developments in adjacent and international jurisdictions, which highlights that in many jurisdictions tariffs are evolving so that they better reflect forward-looking system costs, thereby encouraging better use of the existing network and efficient investment for the future.

“Both networks and retailers have roles to play. Networks can identify key drivers of future costs and ensure their tariff reflects these costs,” noted Toby Brown, a Brattle principal and report co-author. “The network tariff is paid by retailers, who can design a range of simple price plans that customers understand.”

The authors suggest that communicating with customers and understanding customer preferences is a key part of the retailer’s role in a competitive retail market. By contrast, networks do not deal directly with customers, and customers do not directly see network tariffs since they pay a bill directly to the retailers for the bundled end-product of delivered electricity. As such, provided that retail competition is effective, a cost reflective network tariff can be designed to address retailers, who will then create price plans that balance out all retail costs and best suit customer needs. The authors also suggest that reformed network tariffs aimed at retailers could promote more effective retail competition, and that network tariffs could be designed to assist vulnerable customers without conflicting with the objective of reflecting costs.

The report, “Electricity Distribution Network Tariffs: Principles and Analysis of Options,” is authored by Brattle Principals Toby Brown and Ahmad Faruqui, and Senior Associate Neil Lessem. It is available for download below.