Inconsistent approaches by energy regulators confusing and unnecessary, says ENA

Two inconsistent decisions released by Australian energy regulators run the risk of undermining investment certainty in the energy networks sector, according to Energy Networks Association (ENA) chief executive officer John Bradley.

Mr Bradley said the Australian Energy Regulator (AER) and the Western Australian Economic Regulation Authority (WA ERA) had, in December 2013, set out conflicting approaches to estimating rates of return for energy infrastructure, under the same national rules.

“Two energy regulators, under the same rules, have reached conflicting approaches to estimating the cost of equity and debt capital,” Mr Bradley said.

“One thing they have in common is the guidelines unrealistically assume risk in the network sector is falling at a time when every commentator is discussing the massive upheaval in demand trends, customer energy use and technology connecting to networks.

“The AER guideline cuts the current risk premium – effectively suggesting the investment risk profile for the network sector is lower than it was five years ago. This is clearly out of step with every other examination of the energy network sector suggesting that new technology, new markets, and shifting demand are changing the natural risk profile of these businesses.”

Mr Bradley said network businesses were committed to achieving efficient outcomes for consumers through genuine savings from deferring network expansion, reducing overheads and basing network reliability investments on customer value.

The ENA welcomed some aspects of the AER Rate of Return guideline, such as retaining a 10 year term of debt and further guidance on some issues.

Mr Bradley said the Western Australian guideline was a missed opportunity to simplify energy regulation and provide consumers with more stable energy prices in its final Rate of Return guideline.

The ERA Rate of Return Guideline effectively rejects new requirements for the regulator to take into account more than one financial method when estimating a return on equity for investors.

“The ERA Guideline locks in the current approach, despite national rule changes requiring regulators to consider a wider range of relevant financial models and data,” Mr Bradley said.

“This was all about ensuring more stable estimates of financing costs, rather than relying on a single volatile model and the guideline appears to leave Western Australia out of step with the goals of national rule changes.”

Mr Bradley said that, as Australia increasingly looks overseas to fund investment in long-life infrastructure, the inconsistent approaches by two energy regulators were confusing and unnecessary.

“Fixing the inconsistency would be an important measure in cutting the red tape facing energy sector investors,” he said.