Income distribution

Every 5 years, the Australian energy regulator (AER) has to fix the amount of revenue income that network businesses can charge their customers (via the retailers). The AER has just released an issues paper on how it will fix the revenue for the five Victorian electricity distribution businesses. The businesses have already submitted an initial proposal and the issues paper is largely a summary of these proposals, with the AER giving little away about how it might approach this revenue review.

One element that should be settled – and the biggest single number in the review – is the rate of return (also known as the weighted average cost of capital – WACC) as the AER carried out a review of this and its component parts in 2018. Curiously, there still seems to be room for interpretation, with the risk-free rate proposed varying from 1.04 to 1.32 per cent. 28 basis points may not look like a lot but applied to the collective regulatory asset bases (RABs) it’s at least $190m over the five years.

Whatever the WACC turns out to be, it will be lower than the current regulatory period and so the proposals (which are likely to be trimmed by the AER) result in slightly lower revenues overall. The lower WACC and lower tax allowances are not quite offset by higher forecast capital and operating expenditure. The increased expenditure claims may face some scepticism as the businesses are mostly on a downward trend but are expecting a significant step up. Partly this is growth drivers, with all five businesses forecasting higher customer numbers and peak demand, but it’s partly the consequence of government regulation, including the following:

  • Bushfire mitigation rules driving $363m of new capex ($690m has already been approved)
  • New EPA rules driving $202m of new capex, plus a modest amount of opex compliance.
  • An unspecified but material amount to comply with the Security and Critical Infrastructure Act

Each of the distributors has carried out a detailed customer engagement process to be able to demonstrate to the AER that they have taken customer preferences into account in developing their proposals. Ausnet, who service Eastern Victoria, have trialled an in-depth customer forum that has involved intensive engagement with a small group of customer representatives. It will be interesting to see how this process affects the outcome of the review – will it be easier for Ausnet to convince the AER that its proposals are justified? The AER is cautious at this stage but suggests that they may “conduct less extensive assessment of components of capex and opex forecast” for Ausnet compared to the others.

Feedback from one of the customer engagement processes highlights the balancing act expected of networks: around 2/3 of customers thought their electricity bills were too high, while ¾ of them thought the network should be upgraded faster to accommodate rooftop solar  – i.e. they want the business to spend more.

As with everything else at the moment, the shadow of COVID-19 hangs over this process. The AER’s ability to conduct the review and consult with interested parties will be somewhat constrained by physical distancing and work-from-home requirements. They also note that the forecasts of growth in network use and customer numbers “may need to be revisited in light of the impacts of COVID-19 on the economy”.