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

Compliance procedures & guidelines
Date initiated: 
29 November 2021
AER General Inquiries


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.

Through this consultation paper we are commencing a process to examine:

  • 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 focus of this consultation is on the impact of capitalisation on our benchmarking of DNSPs as this is where we have received most feedback. However, the issues and considerations are also broadly applicable to our benchmarking of transmission network service providers.

We intend to use this process to develop a guidance note that sets out how we will address any material impacts on the benchmarking results of differences in capitalisation practices. The intention is that the guidance note will provide DNSPs with greater certainty about how we will assess this issue.