On 27 November 2014 the Australian Energy Regulator (AER) released its draft determinations on the annual revenue requirement for the regulated "poles and wires" businesses in New South Wales – the distributors AusGrid, Endeavour Energy and Essential Energy, and the transmission network operators TransGrid and Directlink.
The AER also released draft determinations for the ActewAGL electricity distribution business in the Australian Capital Territory, and the Jemena Gas Networks gas distribution business in New South Wales.
Proposed revenues versus allowed revenues
Each of the businesses had already lodged their forecast revenue requirements with the AER for review. Having reviewed those, the AER makes its draft determination of the maximum allowable revenue for each business. Here are the total revenue requirements forecast by the businesses for their regulatory periods, and the AER's draft determination:
|
Business |
Business forecast |
AER Draft determination |
% Difference |
Draft allowed WACC |
|
Essential Energy |
$5,561.6M |
$3,678.6M |
-33.86% |
7.15% |
|
Endeavour Energy |
$4,337.5M |
$3,056.8M |
-29.52% |
7.15% |
|
AusGrid |
$10,092.5M |
$6,565.2M |
-34.94% |
7.15% |
|
Directlink transmission |
$99.3M |
$76.3M |
-23.16% |
6.8% |
|
TransGrid transmission |
$3,046.2M |
$2,310.5M |
-24.15% |
7.24% |
|
Jemena Gas Network |
$2,933.3M |
$2,477.3M |
-15.54% |
6.80% |
|
ActewAGL |
$892.0M |
$575.6M |
-35.47% |
6.88% |
Key departures
For each of the businesses, the key departures between their forecast and the AER's draft determination were:
- the amount of capital expenditure (capex) forecast to be required for network augmentation and/or replacement of depreciated assets;
- the level of operating costs; and
- the weighted average cost of capital.
Rate of return
The rate of return allowed by the AER is based on its estimate of the average cost of capital of a benchmark efficient entity running a regulated business. The AER has assumed the benchmark entity would have a debt/equity ratio of 60/40, and has determined the rate of return in accordance with its Rate of Return Guideline (published by the AER in 2013).
For the draft determination, the AER determined an equity beta of 0.7 and an equity risk premium of 4.55% over the risk free rate. Applying this to current 10 year bond rates as the risk free rate, the AER estimated the return on equity to be 8.1%.
For the return on debt, the AER is assuming a trailing average approach where 10% of the entity's debt is refinanced for a further 10 years at prevailing rates each year, rather than assuming that all debt is refinanced on a single day at the start of the regulatory period. The AER assumes that the benchmark entity has a credit rating of BBB+.
A significant difference between the AER's debt return approach and that proposed by the most of the businesses is the transition from the former debt financing arrangements to the new, with the AER's preference being to transition to the new regime gradually, and a number of businesses proposing to adopt the trailing average debt return immediately, without a transitional phase.
The value of corporate income tax imputation credits available to shareholders of a business is also taken into account in the rate of return calculation by the AER. In its 2013 Guideline, the AER proposed valuing imputation credits at 50% of their calculated rate. However, for these determinations the AER has adjusted this to 40%.
Response to AER
The businesses have until 14 January 2015 to revise and lodge their revenue forecasts with the AER, and stakeholders have until 31 January 2015 to lodge comments on the AER's draft determinations and the revised forecasts of the businesses.
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.
