AER finalises its review on the regulatory treatment of inflation

The Australian Energy Regulator (AER) has today released a final position paper on its industry wide review of the regulatory treatment of inflation.

This review included both gas and electricity network industry regulation. In broad terms, we reviewed the best method to estimate expected inflation and whether the regulatory framework delivers appropriate compensation for inflation.

Our final position is to maintain the current approach to derive the best estimate of expected inflation. We also find that the regulatory treatment of inflation appropriately compensates for inflation and therefore it is unnecessary to amend our post-tax revenue model (PTRM) and roll forward model (RFM).

A preliminary position was released for stakeholder engagement in mid-October. We recognise that the decisions we make and the actions we take in performing our regulatory roles and other activities affect a wide range of individuals, businesses and organisations. Energy Consumers Australia, the Consumer Challenge Panel, infrastructure asset investors and network service providers from both electricity and gas industries engaged with us on our preliminary position.  

This final decision is consistent with the preliminary position and reflects the material, insights and evidence provided to us by stakeholders.

We thank stakeholders for their active participation in this review.  

Background

Recently, the method for estimating expected inflation in our regulatory determinations has been the subject of debate. Expected inflation is an important parameter for modelling future revenues in both electricity and gas regulatory determinations.

Our method for estimating expected inflation is set out in the Post-Tax Revenue Model. The National Electricity Rules require us to use the method that is set out on the current version of the model. To fully consider the inflation-related issues that have been raised with us, we instituted an industry-wide consultation and review which includes both gas and electricity network industry regulation.

The first step of this consultation and review was to seek written submissions on our discussion paper on the regulatory treatment of inflation. The discussion paper explored the treatment of inflation in our determination of revenue and prices for electricity and gas network services. Since then, we held a public workshop on the discussion paper, a technical workshop and one-on-one technical sessions to enhance stakeholder understanding of our regulatory models and pricing mechanism.

Our preliminary position was published on 13 October and submissions on it closed on November 6. On 31 October we held an interactive stakeholder engagement workshop on our preliminary position.

Issued date: 
20 December 2017
AER reference: 
AC 187/17
Contact: 
General inquiries - Rate of return RateOfReturn@aer.gov.au