AER releases final decision on rate of return for regulated energy networks

The Australian Energy Regulator (AER) has today issued the 2018 Rate of Return Instrument.

AER chair Paula Conboy said the final decision balances the need for efficient and stable investment to build and maintain Australia’s future energy networks, while ensuring consumers pay no more than necessary for a safe and reliable energy.

“Estimating rate of return is a complex exercise.

“The 2018 instrument is the result of the most comprehensive consultation process we’ve ever undertaken, with consumers, investors and businesses included throughout the process.

“We used the latest information available, well established and accepted methodology, as well as review by an Independent Panel of leading figures in the field.

“It’s expected that the new instrument will help reduce consumer bills by around $30 to $40 a year,” she said.

The Rate of Return Instrument is now binding under the new legislation developed by the CoAG Energy Council. This means that the AER and network businesses are required to set the rate of return according to the Instrument in regulatory determinations over the next four years.

The AER’s process, which commenced in mid-2017, involved an examination of the risk-cost trade off that marks such regulatory decisions.

“We were mindful of the effect on investment incentives of over or underestimating the rate of return.

“Our aim is to provide networks with sufficient revenue to recover the cost of operating for safe and reliable networks, while delivering the stability investors in regulated assets require.

“However as consumers pay for the network through their electricity bills, we need to ensure the rate of return is high enough to attract investment in these long term regulated assets, but not so high that it attracts over investment – and we are confident that we have got this balance right.”

Ms. Conboy recognised the importance the decision will have for network businesses, and said the level of engagement undertaken during the process was significant.

“It was of the utmost importance to us that this review be as open and as robust as possible, and all voices were heard in this process.

“The final instrument sets out our approach to determining the rate of return for regulated energy utilities in Australia and promotes the achievement of the national gas and electricity objectives.”

Background

The AER is required to set the Rate of Return Instrument every four years. Key elements of the 2018 Instrument include:

  2018 Instrument 2013 guideline
Gamma 0.585 0.40
MRP 6.1 % 6.5 %
Beta 0.60 0.70

The indicative rate of return based on November 2018 financial market rates and data is:

  2018 Instrument 2013 guideline
Return on equity 6.36 % 7.25 %
Return on debt 4.70 % 4.77 %
Overall rate of return 5.36 % 5.76 %

Rate of return makes up approximately 50 per cent of a network business’ allowed revenue. The network business’ revenue contributes up to 50 per cent of final electricity bills.

About the AER

The Australian Energy Regulator (AER) works to make all Australian energy consumers better off, now and in the future. 

  • We regulate electricity networks and covered gas pipelines, in all jurisdictions except Western Australia. We set the amount of revenue that network businesses can recover from customers for using these networks.
  • We enforce the laws for the National Electricity Market and spot gas markets in southern and eastern Australia. We monitor and report on the conduct of energy businesses and the effectiveness of competition.
  • We protect the interests of household and small business consumers by enforcing the Retail Law. Our retail energy market functions cover New South Wales, South Australia, Tasmania, the ACT and Queensland. We do not set the prices consumers pay.

We drive effective competition where it is feasible and provide effective regulation where it is not. We equip consumers to participate effectively, including through our Energy Made Easy website, and protect those who are unable to safeguard their own interests. We use our expertise to inform debate about Australia’s energy future.

Issued date: 
17 December 2018
AER reference: 
NR 41/18
Contact: 
AER Media 0466 409 921 media@aer.gov.au