How the AER will assess the impact of capitalisation differences on our benchmarking – Guidance note

On 31 October 2022 the AER published its draft guidance note on how we propose to address any material impacts on the benchmarking results of differences in capitalisation practices.

The draft guidance note aims to provide clarity to electricity distribution network businesses on how the AER intends to assess the impact of differing and changing capitalisation practices on our benchmarking. A settled approach to this question will refine our efficiency assessment toolkit and so is in the long-term interests of consumers.

Consultation

On 29 November 2021, we released the consultation paper How the AER will assess the impact of capitalisation differences on our benchmarking. We invited submissions from interested stakeholders on our Consultation Paper by 18 February 2022. Submissions have been published.

On 31 October 2022 we published the draft guidance note How the AER will assess the impact of capitalisation differences on benchmarking. We invited interested stakeholders to make submissions on our draft guidance note by 14 February 2023. These submission have been published. 

Background

The AER publishes benchmarking results each year in a report on the productivity growth and efficiency of distribution network service providers (DNSPs) in the National Electricity Market (NEM). These results enable us to compare, at a high level, how productively efficient DNSPs are at delivering electricity distribution services over time and compared with their peers.

While DNSPs are broadly comparable, they differ on a range of characteristics, such as network size and aspects of their operating environment. The aim is that the benchmarking results should largely reflect differences in DNSPs’ efficiency, with all other major sources of differences accounted for in the modelling or by adjusting the benchmarking results for differences in operating environment factors. It is therefore important for benchmarking to be carried out on the basis of data that is as consistent and comparable as possible.

One possible difference between DNSPs that may impact the comparability of the benchmarking results relates to differences in capitalisation practices. This includes differences between DNSPs’ practices at a point in time and differences over time in relation to:

• reporting/classification of expenditure as operating expenditure or capital expenditure
• operating expenditure and capital trade-offs.

As a result the key issues being examined are:

• whether there are material differences in capitalisation practices between DNSPs
• whether these differences have a material impact on the comparability of the data on which the AER’s DNSP benchmarking results are based and the benchmarking results
• if there are material impacts on the benchmarking results, what options there are for addressing these impacts, preferred options and the reasons why.

The AER sought submissions to the consultation paper between 29 November 2021 and 18 February 2021.

The AER published the draft guidance note on 31 October 2022 and sought submissions.

The impact of capitalisation on our benchmarking is part of our continuous review of our regulatory toolkit for assessing electricity determinations and will support consumers paying no more than necessary for the safe and reliable distribution of electricity. More details on the techniques we currently apply to assess a distributor’s expenditure assessment proposals is provided in our Expenditure forecast assessment guideline.