We appreciate the opportunity to respond to the Australian Energy Regulator’s (AER) Draft Decision: Essential Energy Distribution Determination 2019 to 24 (the Draft Decision).

Our view is that Essential Energy’s revised proposal is capable of acceptance.

Our assessment of the NSW distribution business determinations has been considered on a decision as-a-whole basis. In our submission to the AER’s Issues Paper, while our view was that Essential Energy’s proposal was capable of acceptance, we noted several issues that require ongoing engagement. These include:

• continuing to put downward pressure on the Regulated Asset Base (RAB);
• improving its capacity utilization rates and approach to capital expenditure (capex);
• adopting the 2018 Rate of Return Guideline; and
• adopting a productivity factor of no less than one per cent.

Essential Energy’s revised proposal goes some way to address what we have now defined as “The Essential Dilemma”. The Essential Dilemma refers to a steadily growing RAB despite reducing proposed expenditure. Essential Energy’s revised proposal incudes analysis to explain what is driving RAB growth. This analysis indicates that Essential Energy’s RAB is being driven by a distortion of the true RAB growth (through errors in the opening RAB and how gifted assets are treated); drivers of true RAB growth (including needing to meet reliability standards and lower than expected load growth); and items that have inflated the RAB (unit rate increases and depreciation) ^[1]Essential Energy, Empowering communities to share and use energy for a better tomorrow. 2019-24 Revised Regulatory Proposal, page 19.

Given the transparent nature of Essential Energy’s consumer engagement approach, we will continue to engage with Essential Energy as it develops and delivers the to-be-developed options for managing its future RAB growth. We are pleased to see that Essential Energy’s revised proposal is $70 million (real, June 2019) lower than the AER’s Draft Decision.^[2]Essential Energy, Empowering communities to share and use energy for a better tomorrow. 2019-24, Revised Regulatory Proposal, page 27

The AER’s Draft Decision was that it was satisfied that Essential Energy’s forecast reasonably reflected the capex criteria, and made a correction to a Consumer Price Index (CPI) escalation error. The rectification of this error will see the forecast capex reduce from $2099.6 million ($2018-19) to $2081.2 million ($2018-19)^[3]AER, Draft Decision, Essential Energy Distribution Determination 2019-24, Attachment 5 Capital Expenditure, page 5-8.

On the matter of the rate of return, Essential Energy has adopted the 2018 Rate of Return Guideline. What this means for consumers is that, instead of decreasing the average real revenue by 0.44 per cent (as per the AER’s Draft Decision), the updated proposal sees the new rate of return decreasing average real annual revenue by 0.90 per cent.^[4]4 Essential Energy, Empowering communities to share and use energy for a better tomorrow. 2019-24, Revised Regulatory Proposal, page 18.

Essential Energy’s revised proposal indicates that is transformation program has resulted in decreasing overheads since 2014-15, and that we will continue to see a reduction in its overheads over the 2019-24 period. Essential Energy’s analysis indicates that “…by 2023-24, our total overheads will be 31 per cent lower than in 2014-15”.^[5]Essential Energy, Empowering communities to share and use energy for a better tomorrow. 2019-24, Revised Regulatory Proposal, page 50. We continue to support an approach by network businesses that see productivity improvements of no less than one per cent per year.

The full submission can be read here.