AER releases draft decision on Rate of Return Guideline

Energy networks have slammed the Australian Energy Regulator’s (AER) draft Rate of Return Guideline, released this week, warning it is not in the long-term interest of customers.

AER chair Paula Conboy said the guideline reflected the outcome of a significant engagement and consultation process, and would provide a stable investment climate.

Ms Conboy said if implemented, the guideline could see power bills decrease by up to $40 a year.

“As the regulator, our aim is not simply lower prices, it is ensuring the lowest efficient costs required to build and maintain safe and reliable networks,” she said.

“If the rate of return is too high, over-investment could follow and customers pay more than necessary. If it is too low insufficient investment may result, risking reliability.

“This draft guideline is the result of the most extensive consultation process yet undertaken by the AER.”

Energy Networks Australia has warned the proposal to further slash rates of return for network businesses does not strike the right balance between lower costs to customers and sustainable business returns for investors.

Acting CEO Tamatha Smith said the draft Rate of Return Guideline would strip about 13 per cent or $2 billion over five years from the gas and electricity network sector.

It represented the largest single reduction proposed to the amount network businesses could recover on their infrastructure investment and it went too far.

“Network prices and rates of return have been falling consistently for the past five years,” Ms Smith said.

“This latest proposal follows the significant cuts already imposed in 2013 and 2009 and does not deliver the predictable framework the energy network sector needs to ensure investment security – which is in the long-term interests of customers.

“Network businesses have also responded to the need for lower costs to customers, delivering efficiencies in their operations while maintaining reliable and safe essential energy services.

“We have to achieve a balance that meets the need for business to attract lowest-cost finance for essential power infrastructure investment and to keep prices down.

“This proposed sharp reduction in the rate of return will have long term ramifications for these essential services by making it harder to attract capital for investments that will support strong wholesale market competition and the rapid connection of growing sources of generation throughout the grid.”

As part of its extensive consultation process, the AER has established an Independent Panel to review the draft guideline and report within 50 business days on whether it is supported by sound reasoning based on available information.

“It is vital that we get this guideline right,” Ms Conboy said.

“Ultimately it is consumers that foot the bill for network costs and in an era of major concerns about energy affordability, this proposed change will have an impact on Australian businesses and households for years to come.”

A final decision released in December 2018.