The Australian Energy Regulator (AER) has released a draft decision on the new Rate of Return Guideline.  

AER chair Paula Conboy said the draft decision on the Rate of Return Guideline reflected the outcome of a significant engagement and consultation process, and would provide the stable investment climate required to build and maintain Australia’s energy networks into the future.

“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. 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. If implemented, this draft guideline could result in household customers’ bills decreasing by around $30 to $40 per year,” said Ms Conboy.

The rate of return is a forecast of the cost of funds a network business requires to attract investment in its network, and makes up approximately 50 per cent of a network business’ allowed revenue.

Lynne Gallagher, Acting Chief Executive Officer of Energy Consumers Australia, supported the new guidelines saying that changes to the allowed rate of return would be reflected in lower electricity prices for consumers.

“Allowing gas and electricity network businesses to earn excessive returns on their investment in the poles and wires not only costs consumers too much today, but it gives these businesses an incentive to over-invest, further adding to the cost for consumers in future years.

“Energy consumers are telling us affordability is their primary concern and should be a constraint on all our investments and decisions about energy – an explicit criterion in decision-making by energy companies and regulators.

“That means that existing and future investment in the power system must be optimised based on consumers demands that not one more dollar is spent than required, and new investments are not made one day earlier than is necessary.

“Given that the rate of return on capital makes up half of the revenue of these network businesses, consumers could expect to see significant benefits flowing through into their bills.”

Energy Networks Australia however warned that the proposal 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. 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,” Ms Smith said.

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.

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