AER Statement – Institute for Energy Economics and Financial Analysis report on regulated network electricity prices

Quotes attributable to AER Chair Ms Clare Savage

We have not had the opportunity to contribute to or even review this report which is disappointing. We are concerned about any claims that our regulatory framework provides electricity networks with supernormal profits.

Our regulatory framework is based on enabling networks to earn an adequate rate of return if they produce efficiently.

Businesses can earn returns above the rate of return set by the regulator if they outperform the expenditure forecasts set by the regulator, or they provide demonstrated benefits to consumers. This is part of the incentive-based regulatory framework where businesses are rewarded to the extent they are able to promote better long term outcomes for consumers.

When a network business improves productivity and realises efficiency gains that allows for additional returns in the current regulatory period, these benefits are ultimately passed through to consumers in the form of lower prices in the next regulatory period.

Consumers have benefited significantly from the incentive based regulatory framework, with reductions in network expenditures and revenues over time. Capex incurred by distribution businesses per customer has steadily reduced and was 50 per cent lower in 2020–21 in comparison to its peak in 2011.

Despite the benefits that have been realised, we are consistently assessing how our regulatory regime is performing in delivering outcomes that are in the long-term interest of consumers and looking for areas of improvement. Work we have done or are currently undertaking includes:

  • Better Resets Handbook 2021
    The Handbook released in December 2021 emphasises the need for networks to engage more with consumers and highlights our expectations of what of a good regulatory proposal looks like, including what good consumer engagement looks like.
  • Review of Incentive Schemes for regulated networks 2021–23
    This work commenced in October 2021, assesses incentive schemes for expenditure and whether they are delivering outcomes consistent with the long-term interest of consumers. Analysis published so far highlights the schemes have resulted in productivity improvements by networks and benefits being realised by consumers and businesses. Nevertheless, we have identified there are potential improvements to the way we assess the efficiency of capital expenditure. We will shortly publish a draft decision outlining our positions.
  • Rate of Return Instrument Review 2022
    This work looks at how we should set the rate of return for regulated networks to ensure that an efficient business is able to earn an adequate rate of return in making investments necessary to meet the needs of consumers. We issued a draft decision in July and we will issue a final decision in December 2022.
  • Benchmarking
    We undertake an annual benchmarking report of electricity network businesses comparing their relative performance. We have consistently looked to improve and refine our approach to this review in consultation with stakeholders. We are currently looking at issues around approaches to capitalisation of expenditure by businesses and expect to finalise our position in the coming months. We are also looking at how we should undertake benchmarking in light of the increased take up of consumer energy resources, such as solar and batteries, by households and businesses.

We produce regular publicly available network performance reports and have extensive consultation in each of our regulatory reset processes.

Sector: 
Issued date: 
4 October 2022
AER reference: 
NR 57/22
Contact: 
AER Media 0466 409 921 media@aer.gov.au