QCOSS has made a submission to the Review of Rate of Return Guideline by the The Australian Energy Regulator (AER). The AER’s task in setting the rate of return is to determine what a network would earn as a rate of return in a (non-monopolistic) competitive market. In this context, the Guideline attempts to set principles that generate the same returns that a network would face in a competitive market.
QCOSS is concerned that the current rates of return based on the existing Guideline are not efficient and do not reflect the same returns that a network would be able to achieve in a competitive market.
The AER’s approach considers components under the model to determine the rate of return, but does not apply a test to ensure that the outcome is reasonable. The AER has also become cautious in their valuation by selecting components at the top end of the plausible range of values and thereby favouring networks over consumers.
In seeking to achieve the balance between the interests of networks and consumers in a way that is fair to all parties, it is necessary to consider all aspects of the system that are relevant to the determination of the rate of return. Our view is that the rate of return is over compensating networks for the level of risk that they face, and the higher rate of return has translated into excessive prices for consumers.
The 2018 Rate of Return Guideline should adjust the AER’s approach:
• To determine the rate of return, the AER should consider a broader set of metrics than the model currently allows, including observations of actual investment behaviour of the networks.
• This broader set of metrics would aim reveal whether the outcome under the model is fair and reasonable.
• At a minimum, the broader set of metrics should look to more accurately determine efficiency, including identifying the extent of any over investment.
• In principle, where the AER has to exercise its discretion and judgement, their decisions should favour consumers over the networks.
QCOSS believes that with these adjustments, the rate of return determined under the model is more likely to:
• be more reflective of the efficient returns that a network would be able to achieve in a competitive market;
• encourage more efficient investment decisions, and;
• continue to put downward pressure on network prices.