Regulation and the New Facilities Investment Test
Why is Western Power Regulated?
As the sole owner and operator of the electricity network in the south-west of Western Australia, Western Power is a natural monopoly delivering an essential service.
Western Power is regulated by an independent body of State Government, the Economic Regulation Authority (ERA), to ensure that an efficient service is delivered at a fair price.
The Economic Regulation Authority (ERA) is the independent economic regulator for Western Australia. They are designed to maintain a competitive, efficient and fair commercial environment, particularly where businesses operate as natural monopolies, for the benefit of the Western Australian community.
Regulation ensures the delivery of an efficient service for a fair price for the community.
What is the New Facilities Investment Test (‘NFIT’)?
In principle, the New Facilities Investment Test (NFIT) is a test for sound investment decisions. Essentially, it seeks to answer and make clear demonstration of the questions – ‘are we planning to do the right things, at the right price, at the right time?’
New facilities investment is the capital cost associated with an upgrade or change to the electricity network. NFIT is a formal test under the Electricity Networks Access Code (the Code) 2004 and assesses the efficiency of capital investment. It is a formal methodology required by the Code - and applied by the Economic Regulation Authority (ERA). It assesses Western Power’s justification of each new network augmentation and our expenditure efficiency. NFIT is the measure that Western Power is following good business practice in the absence of competition.
What is the difference between the Regulatory Test and the New Facilities Investment Test?
The Regulatory Test applies only to large projects, while NFIT is applicable to all capital expenditure.
The Regulatory Test is applied specifically to ‘Major Augmentations’ (defined under the code) and evaluates a project at a point where a preferred option has been chosen. It must be sought from the ERA for major augmentations prior to committing to capital investment.
NFIT pre-approval (which is what Western Power is seeking for this project) encompasses the options analysis and the details of the selected option; demonstrating that the chosen solution will efficiently minimise costs and will meet one or more of the incremental revenue, net benefit and reliability tests. Seeking NFIT pre-approval allows us to move forward with a project with the confidence that it will achieve the best outcomes for the State, and offer an efficient and effective investment decision.
NFIT approval is typically carried out at the end of an Access Arrangement period (An access arrangement is Western Power’s performance contract with its customers, reviewed and approved by the Economic Regulation Authority (ERA). It shapes the way we do business, impacting our expenditure, revenue and service standards.) encompassing all of the information of the previous two stages, as well as demonstrating the efficient delivery of a project.
How does the NFIT pre approval (which is being undertaken in this case) process work?
The indicative key steps associated with a NFIT pre-approval are:
- Western Power submits to the Economic Regulation Authority (ERA)
- ERA considers/review the submission
- ERA publishes issues paper and potentially seeks public submissions
- Draft decision published
- Final decision published
More information
- Economic Regulation Authority - http://www.erawa.com.au/
- Western Power Access Arrangement
- How Western Power is regulated
