The Australian Competition Tribunal has handed down its decision on an appeal by the NSW electricity distribution network operators and the NSW and Tasmanian electricity transmission network operators against the AER's April 2009 distribution and transmission revenue determinations for these networks.
The Tribunal found that the AER made an error in setting the period to be used to calculate the reference Commonwealth government bond rate for determining the cost of capital for these networks.
The Tribunal determined that the averaging period to be applied should be one ending on 5 September 2008 as proposed by the businesses rather than the February/March 2009 period determined by the AER. The Tribunal's decision increases the networks' allowed cost of capital to around 10.0 per cent from around 8.8 per cent.
"The AER is required to establish an unbiased bond rate for determining the cost of capital," AER chairman Mr Steve Edwell said. "This is done by determining an averaging period. The Commonwealth government bond rate in February/March 2009 was low by comparison to the bond rate in June 2008 when the networks submitted their proposals. The AER, however, followed standard regulatory practice in requiring the cost of capital to be based on a market bond rate observed near the commencement of the regulatory control period.
"The AER will study the Tribunal's decision and assess its implications for future regulatory decisions. However, in the case of the AER's current review of the Queensland and South Australian electricity distributors' regulatory proposals these will not be affected as these networks have nominated averaging periods aligned to the commencement of their regulatory control period in 2010."
The cost of capital is a major determinant of network charges. The Tribunal's determination has increased allowed revenues of Country Energy by $411 million, EnergyAustralia by $818 million and Integral Energy by $321 million. These amounts will be recovered from users over the next four years. Network prices for these businesses will increase in July 2010 by 17.90 per cent, 18.18 per cent and 13.00 per cent plus CPI respectively following this decision.
The allowed revenues of TransGrid and Transend will increase by $381 million and $80 million respectively.
The Tribunal did not uphold the network operators' appeal against the AER's methodology for establishing the corporate debt margin which is also part of the calculation of the cost of capital. The Tribunal also did not uphold the appeal by EnergyAustralia against the AER's decision to reduce its forecast operating expenditure allowance by $169 million to $2628 million. The Tribunal did find error in the AER's decision to reduce TransGrid's operating expenditure allowance by $14 million to $692 million.
The Tribunal also accepted parts of EnergyAustralia's claim that the AER had determined EnergyAustralia's public lighting charges on an incorrect basis. The Tribunal remitted the matter back to the AER to re-determine taking account of information submitted by EnergyAustralia and interested parties.