AER releases final decision on rate of return

rate of return

The Australian Energy Regulator (AER) has issued its final decision on the rate of return for regulated energy networks, issuing the 2018 Rate of Return Instrument.

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.

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,” she said.

“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.”

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Energy Networks Australia says the decision to make material cuts to network returns is not in the long-term interests of consumers.

“This is a short-sighted decision that is inconsistent with market evidence and could end up delivering perverse results for customers,” Energy Networks CEO Andrew Dillon said.

“Energy users will ultimately be the losers if regulatory settings don’t support financeable outcomes for networks that enable access to low cost capital markets.

“Australia’s network sector now faces lower regulated returns than our peers. Our regulated equity returns for networks used to be comparable to the United Kingdom, the United States and New Zealand. They now resemble those of heavily centralised Eastern European countries with poor reliability.”

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Mr Dillon said the decision lacked balance given the distribution and transmission components of power bills had fallen across the country and made up as little as 26 per cent of average bills in some regions. Combined with strong network productivity, it was clear customers were already getting better services from networks at lower cost.

The AER announcement was welcome news to Energy Consumers Australia, which said the decision “on the rate of return monopoly network businesses can earn will help create breathing space for consumers struggling with energy affordability”.

“We urge investors and network businesses to accept what is in essence a conservative decision by the Australian Energy Regulator and focus on delivering affordable, high-quality network services for Australian households and small businesses,” Energy Consumers Association CEO Rosemary Sinclair 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.