AER issues proposed regulatory arrangements for electricity distribution businesses

The Australian Energy Regulator today issued proposed regulatory arrangements to assist with its regulation of electricity distribution businesses. The arrangements are issued for public comment, as required under the National Electricity Rules.

The AER is undertaking this consultation as part of its new role in the national regulation of electricity distribution networks, which commenced on 1 January 2008 under the National Electricity Law. The AER invites written submissions by 14 May 2008.

The proposed regulatory arrangements incorporate:

the post-tax revenue model
the roll forward model
an efficiency benefit sharing scheme
a service target performance incentive scheme
cost allocation guidelines.
"The proposed regulatory arrangements are intended to provide greater certainty and clarity to both regulated businesses and other interested parties on how the AER will regulate the pricing and revenues of distribution businesses under a national framework," AER Chairman, Mr Steve Edwell said.

"The incentive schemes in particular have also been designed to provide some degree of flexibility in how these distribution businesses would be regulated to account for the differing nature of distribution regulation which has been applied to date in individual jurisdictions. Over time, the AER expects that a more consistent approach to regulation will evolve."

A copy of each of the proposed guidelines, models and schemes and related material will be available from the AER's website.

Summary of proposed regulatory arrangements

Separate guidelines are proposed that cover each of the following regulatory requirements on distribution network service providers when making applications to the AER in relation to their allowed revenues and prices:

Post-Tax Revenue Model

The PTRM is a spreadsheet model which is used by the AER to determine the allowed stream of future revenues of a regulated business in each year of the regulatory period. These allowed annual revenues need to be sufficient to recover the return on capital, a return of capital, operating expenditure and tax payable. In this way, the PTRM ensures that the allowed annual revenue stream is equal to the annual expenditure stream of the regulated business.

Roll-Forward Model

This model provides a method for regulated businesses to use to calculate the regulatory asset base (RAB) from the beginning of one regulatory period to the beginning of the next period, as well as from year to year within each period. The RAB values from the RFM form inputs into the PTRM, where they are used to determine the return of and on capital of the regulated business.

Efficiency Benefit Sharing Scheme

This scheme sets out an incentive mechanism whereby the business can earn additional revenue or be penalised depending on whether the business beats or exceeds targets for its operational expenditure in each year of the regulatory control period. This provides a business with a continuous incentive to make efficiency savings on its operating costs throughout a regulatory period.

Service Targets Performance Incentive Scheme

This scheme is designed to balance the incentive to reduce expenditure with the need to maintain and improve service performance by providing the regulated business with financial incentives to maintain and improve its service performance.

Cost Allocation Guidelines

Sets out the basis on which a regulated business must allocate costs to the categories of activity within the business. Its primary purpose is to ensure that costs charged to regulated activities are properly related to those regulated activities. Note that this guideline does not cover the allocation of costs for pricing purposes which is to be subject of a future pricing guideline.

Issued date: 
2 April 2008
AER reference: 
NR 004/08
Steve Edwell, AER Chairman 03 9290 1421 0423 047 554
Lin Enright, Media 02 6243 1108 0414 613 520
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