AER Statement – Institute for Energy Economics and Financial Analysis report on electricity network profits

IEEFA’s estimates of outperformance on returns are similar to those reported in the AER’s Annual Electricity Network Performance Report

The ability of business to outperform the regulated rate of return is the incentive-based framework working as intended under the legislation. The outperformance is not an indicator of “supernormal profits”, nor having a material impact on customer bills.

The AER publishes an annual Electricity network performance report that assesses the overall performance of network businesses and outcomes under the existing regulatory framework.

In the last two reports the AER has highlighted that as provided for under the rules, electricity networks have outperformed the regulated rate of return, with the level of outperformance reducing over time.

IEEFA in its 2022 and 2023 report has used data from the AER’s reports and converted the outperformance reported to a dollar measure and inferred a bill impact to consumers. IEEFA’s 2023 report estimates outperformance based on a return on equity measure over the 2014–22 period of $11.1 billion ($2022, real).

We derive a similar outcome to IEEFA with a return on equity of $9.7 billion out of total revenue of $122 billion ($2022, real).

The difference is that our estimate uses the actual leverage of the networks businesses as opposed to average gearing across networks used by IEEFA.

The current incentive-based regulatory framework delivers large benefits to consumers

The AER implements the current regulatory framework in line with legislative requirements which specify that an incentive-based approach should be taken in regulating network businesses.^[1] Our position is that the current regulatory framework is effective and consistent with the National Electricity Law (NEL) and National Energy Objectives (NEO).

The incentive schemes in place under the regulatory framework reward networks for improving productivity and service performance beyond benchmarks. This ultimately provides benefits to customers in the form of lower prices and superior service levels.

Current expenditure incentive schemes are designed so that 70 per cent to 80 per cent of the benefits of reductions in expenditure by networks are shared with consumers, such that the additional returns to networks earned from increasing efficiency in the current regulatory period, are passed on to consumers in the form of lower prices in the next period.

Our analysis shows that over 2014–22:^[2]

• Capital expenditure per customer has declined by 36 per cent
• Operating expenditure per customer has declined by 24 per cent
• Service performance levels have improved, with the number of outages decreasing by 19 per cent, and a general downward trend in the duration of outages except for a slight increase in the most recent year
• Revenue per customer has declined by 33 per cent

View our October 2022 statement on the IEFFA 2022 report.