Profitability measures for electricity and gas network businesses

Status: 
Date initiated: 
8 November 2017
Effective date: 
20 December 2019
Contact: 
AER General inquiries AERInquiry@aer.gov.au
AER reference: 
61378

Overview

We are undertaking a review into measures of profitability that can be applied to the electricity and gas network businesses that we regulate. In 2018, we published a draft position paper and return on assets data for the electricity distribution and transmission networks we regulate. We intend to publish our final position paper on the profitability measures in December 2019.

A stakeholder working group has been established to provide input on key issues raised in submissions on the draft position paper and on information requirements to calculate the profitability measures based on regulatory accounting information. We will consider further assessment of the use of statutory accounting information after the final position paper has been published.

Following consideration by the working group, we have updated the text in the return on assets explanatory note to provide better guidance on how the revenue cap control mechanism operates to assist readers with the interpretation of the return on assets data.

Update

In September 2018, we published Return on Assets ratios for the electricity network businesses we regulate. Since publication of this initial information, we have begun to report return on assets ratios as part of our annual performance reporting. In some cases, the next round of reporting has updated the data and ratios previously reported. The most recent round of network return on assets ratios were published as part of the distribution network performance data 2006-2018 and the transmission network performance data 2006-2018. The publication of this information responds to calls from stakeholders for greater transparency around the actual returns achieved by the businesses.

On 11 July 2019, we published a discussion paper on the advice we sought from PricewaterhouseCoopers (PwC) on approaches to allocate interest and tax expenses from corporate groups to network service providers (NSPs) for determining the return on equity (regulatory) profitability measure. Submissions on PwC's advice and the associated data that would be required to make these allocations were requested by 22 August 2019. We have now published these submissions.

Background

The review of Profitability measures for electricity and gas network businesses aims to identify profitability measures and their associated data requirements to allow us to report and compare the returns of regulated service providers. Our primary purpose in reporting on the profitability of service providers is to provide transparency. Information on profits will assist stakeholders when engaging with network businesses and making submissions to our regulatory determinations and other regulatory processes. 

In 2017, McGrathNicol undertook a scoping study to identify relevant measures of profitability and the data requirements underpinning them. In November 2017 we published a discussion paper and the scoping study. The discussion paper summarised the findings of the scoping study, outlined the recommended profitability measures McGrathNicol had identified and set out the data requirements to calculate those measures. The discussion paper also raised a number of questions regarding the profitability measures and the data required to support them.

In April 2018, we published a draft position paper responding to issues raised in submissions on our discussion paper, providing our views on a number of profitability measures and indicating the measures we intend to report. Submissions on our draft position paper closed at the end of May 2018.

We held a public forum in May 2018 to provide an opportunity for stakeholders to present their views on the draft position paper. At the forum and in submissions on the draft position paper a number of stakeholders proposed that we take a staged approach to the remainder of the review and that a working group with consumer and industry representatives be formed to provide its views on key issues.