Within the NEM, electricity DNSPs are subject to economic regulation by the AER to ensure they do not exploit their market position by charging excessive prices or providing substandard service. Overall, electricity network regulation attempts to ensure that DNSPs meet reliability standards at the lowest cost to consumers.

Network reliability standards are generally set by state and territory utility licencing authorities. These standards define the level of service that distribution and transmission networks must provide and vary across jurisdictions.

Reliability is commonly measured as:

• System Average Interruption Duration Index: SAID is the average total duration of interruptions (in minutes) experienced by customers over a year.
• System Average Interruption Frequency Index: SAIFI is the average number of interruptions each customer experiences per year.

For example, a DNSP may be required to keep SAIDI below a certain threshold, such as 120 minutes per customer per year, and SAIFI below 1.5 interruptions per customer per year.

The role of the AER as the network economic regulator

The AER regulates DNSPs and TNSPs under the NER. Its economic regulation functions include:

• Revenue determinations: The AER sets the maximum revenue that network businesses can recover from consumers over a regulatory control period (typically five years). This is done through a detailed assessment of the businesses’ expenditure proposals, including capital and operating costs, and involves public consultation.
• Expenditure forecasts: The AER assesses whether proposed expenditures are efficient, prudent, and reflective of realistic demand forecasts based on benchmarking, historical performance data, and stakeholder input.
• Ring-fencing and waivers: The AER administers the Ring-fencing Guidelines, which require NSPs to separate regulated network activities from contestable services (e.g., retail or developer-like services) to prevent cross-subsidisation and ensure competitive neutrality. NSPs may apply for ring-fencing waivers where strict separation would hinder efficient outcomes or where the market for a service is not yet fully contestable. Waivers are assessed case-by-case and typically include conditions to protect competition and consumer interests
• Regulatory Sandbox (AER Regulatory Sandboxing Framework): The AER administers the national Regulatory Sandbox Framework, which enables innovators, networks, and market participants to trial new technologies, business models and CER integration approaches in a controlled environment. The sandbox provides temporary regulatory relief, such as exemptions, rule waivers, or tailored regulatory arrangements, so projects can operate without being constrained by existing rules. Trials are assessed for consumer protections, system impacts, and scalability, and insights are used to inform future rule changes and regulatory reform.
• Rate of Return allowance: The AER determines the allowed rate of return on capital invested by network businesses. This is a key input into revenue determinations and is reviewed every four years through a separate consultation process.
• Incentive schemes: The AER applies incentive schemes to encourage efficient investment and service delivery. These include EBSS, CESS & STPIS.
• Annual pricing approvals: The AER approves annual network tariffs to ensure they comply with the revenue determination and pricing principles.
• Application of reliability standards: While reliability standards are set by jurisdictional governments and the Reliability Panel (under the AEMC), the AER ensures that network businesses incorporate these standards into their planning and operations.
• Performance reporting: The AER monitors and reports on the reliability performance of DNSPs and TNSPs. It publishes annual reports comparing actual performance against targets, which inform future regulatory decisions and public accountability.
• Incentive schemes: The AER applies a range of incentive schemes to encourage efficient investment and service delivery, including:
  • Demand Management Innovation Allowance: DMIA Provides funding for NSPs to trial innovative non-network solutions, including demand response and emerging CER technologies.
  • Demand Management Incentive Scheme: DMIS encourages DNSPs to implement cost-effective non-network solutions that can defer or avoid network augmentation.
  • Service Target Performance Incentive Scheme: STPIS is an incentive scheme for DNSPs to promote enhanced reliability and customer service.
• Enforcement Powers: The AER can investigate and enforce compliance with reliability obligations under the NER, including imposing penalties for breaches.