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Submission to AER Regulatory Treatment of Inflation Discussion Paper 

Author

David Havyatt

Energy Consumers Australia appreciates the opportunity to comment on the Australian Energy Regulator’s (AER) Regulatory Treatment of Inflation Discussion Paper (the Paper). As with all aspects of the economic regulation of networks, the treatment of inflation has significant impact on the prices paid by consumers for network services and hence on the achievement of the national energy objectives.

Energy Consumers Australia is the national voice for residential and small business energy consumers. Established by the then Council of Australian Governments (COAG) Energy Council in 2015, our objective is to promote the long-term interests of energy consumers with respect to price, quality, reliability, safety and security of supply.

Our research on consumer preferences and expectations through the Energy Consumer Sentiment Survey (ECSS) and the Consumer Expectations Research reveals that consumers’ highest priority remains affordability and the area of least satisfaction is current value for money. At the same time consumers expectation is that energy services are simple and easy to manage.

Based on this research, we have developed the ‘Affordable, Individualised, Optimised’ or ‘AIO’ framework to describe the way these elements around value, technology and trust are interacting in the new energy system. In simple terms what the concept says is that in the new market affordability is a function of individualised services within an optimised system. The A-I-O framework creates twin goals of delivering energy services at least cost and putting the consumer in control.

We approach the review of expected inflation (the Review) through this lens. While the treatment of inflation has significant impact in the functioning of the mechanics of economic regulation, fundamentally the ‘building block model’, our consideration is based on the wider context of consumer expectations on the future of networks, especially electricity distribution networks.

Three key issues

In the Paper the AER states that it will initially examine three key issues:

  • What method should we use to estimate expected inflation?
  • Does the regulatory framework successfully deliver the expected real rate of return under the current approach?
  • Should we instead target a nominal or hybrid return?

In this submission we propose that the AER should not change the method used to estimate expected inflation, that the framework (i.e. the Post Tax Revenue Model (PTRM) and the Roll Forward Model (RFM)) delivers the expected real return, and that no case has yet been made on changing the overall regulatory approach from targeting a real return to targeting a nominal or hybrid return.

The full submission can be read here.

Figure 1: Year on Year CPI and the RBA target cash rate


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