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AER - Explanatory statement - Distribution Demand management innovation allowance mechanism

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Final decision

Step

On 14 December 2017, we published our demand management incentive scheme and innovation allowance mechanism. We also published a fact sheet and explanatory statements to assist in understanding why we have reached the positions set out in the scheme and mechanism.

Update

As part of the 2023-24 Demand Management Incentive Allowance Mechanism (DMIAM) annual compliance review we noticed errors in the distribution and transmission DMIAM carryover formulae.

After results for the five years of the current regulatory control period are known, the AER is required to calculate a carryover adjustment to return the amount of any underspent or unapproved DMIAM amounts to customers. 2023-24 was the first time the AER has been required to apply the DMIAM carryover adjustment.

When we moved from the DMIA to the distribution DMIAM in 2017, we updated the carryover formula to account for the annual updating of the allowed rate of return. The purpose and function of the formula did not change. However, we now know that the simplified formula contained typographical errors. A brief description of the errors in the DMIAM carryover formula is as follows:

  • Error 1: The DMIAM carryover formula used the same rate of return value for each year, as derived in year 5 of the regulatory control period, rather than calculating the rate of return value each regulatory year as required under the rate of return instrument.
  • Error 2: Rather than taking the time zero value of cumulative carryovers forward to the second year of the subsequent regulatory period (i.e. 7 years), the DMIAM carryover formula inadvertently moved the carryover forward by 28 periods. 

The implication of not fixing the errors in the formula was that we would have been applying DMIAM carryover amounts several times higher than they should be given the intent of the carryover mechanism. 

Essentially the same DMIAM carryover formula applies for DNSPs and TNSPs, so the errors and corrections of the errors are consistent across both mechanisms.

We have now corrected the formulae and have amended the mechanisms and accompanying explanatory statements to reflect the corrections.