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

On 26 May 2023 the AER published its final guidance note on how we will address material impacts on the benchmarking results of differences in electricity distribution network service provider’s (DNSPs) capitalisation practices (how costs are allocated between operating and capital expenditure). We intend to adopt this approach starting in the 2023 Annual Benchmarking report for distribution.

Consultation

On 29 November 2021, we released a 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. We received submissions from 15 stakeholders. Submissions have been published. 

Following this, on 31 October 2022 we published a draft guidance note setting out how we proposed to address any material impacts on the benchmarking results due to differences in capitalisation practices. We invited submissions from interested stakeholders on our draft guidance note by 14 February 2023. We received submissions from 10 stakeholders representing 12 DNSPs. Submissions have been published.

As a part of these consultation processes, we noted a settled approach to this question will refine our expenditure assessment toolkit and so is in the long-term interests of consumers.

Background

The AER publishes benchmarking results each year in a report on the productivity growth and efficiency of 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 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 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 examined were:

• 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
• implementation matters with our preferred approach.

The review of the impact of capitalisation differences on our benchmarking results 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.