Review of expected inflation 2017

Status: 
Category: 
Post tax revenue model
Roll forward model
Date initiated: 
18 April 2017
Effective date: 
31 December 2017
Contact: 
General inquiries - Rate of return RateOfReturn@aer.gov.au
AER reference: 
58744

Overview

We undertook this comprehensive review of our regulatory treatment of inflation in order to test whether our inflation approach remained appropriate. Some stakeholders submitted that our method for estimating expected inflation was incorrect, and so we were incorrectly setting their revenue allowances. Others submitted that our approach to inflation did not deliver the returns that were expected based on our regulatory determination. The review allowed us to address these submissions, as well as submissions from other stakeholders.

Our final position was released on 20 December 2017. We recognise that the decisions we make and the actions we take in performing our regulatory roles and other activities affect a wide range of individuals, businesses and organisations. Energy Consumers Australia, the Consumer Challenge Panel, infrastructure asset investors and network service providers from both electricity and gas industries engaged with us throughout the review process, and we thank them for their active participation.

Background

To fully consider inflation-related issues that were raised with us, we instituted an industry-wide consultation and review which included both gas and electricity network industry regulation. In broad terms, we reviewed the best method to estimate expected inflation and whether the regulatory framework delivers appropriate compensation for inflation.

The first step of this consultation and review was to seek written submissions on our discussion paper on the regulatory treatment of inflation. The discussion paper explored the treatment of inflation in our determination of revenue and prices for electricity and gas network services. Since then, we held a public workshop on the discussion paper, a technical workshop and one-on-one technical sessions to enhance stakeholder understanding of our regulatory models and pricing mechanism.

Our preliminary position was published on 13 October 2017 and submissions in response closed on 6 November 2017. On 31 October 2017 we held an interactive stakeholder engagement workshop on our preliminary position.