RAJ REPORT

May 5 th the ’death spiral’ will start for the Labor Government , when the AER forces a electricity price reduction in Queensland—-How will the Government save ETU JOBS—-The Treasurer will have to give the spin of the century

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The report recommended an urgent investigation into electricity production, asking state governments to “prioritise efforts” to focus on whether networks are properly anticipating more and more customers going “off-grid”.

Meanwhile, the committee is still considering allegations of price rorting by electricity company Energex.

The inquiry was sparked by an Energex whistleblower’s revelations published in The Courier-Mail last year that it looked into manipulating data to target a higher rate of return.

 

 

 

An energy ’death spiral’ could result in electricity prices skyrocketing as more consumers go ‘off-grid’ | The Courier-Mail.

 

Our rate of return guideline sets out how we determine the return that electricity and gas network businesses can earn on their investments. Applied consistently over time, the guideline provides regulatory stability and increased certainty through greater transparency of the key components of the rate of return and how these are assessed. Our approach will balance the interests of stakeholders by providing the opportunity for the recovery of efficient financing costs and more stable returns for the businesses, and more stable price movements for consumers. What is the rate of return? The allowed rate of return is the forecast of the cost of funds a network business requires to attract investment in the network. To estimate this cost, we consider the cost of the two sources of funds for investments—equity and debt. The return on equity is the return shareholders of the business will require for them to continue to invest. The return on debt is the interest rate the network business pays when it borrows money to invest. We consider that efficient network businesses would fund their investments by borrowing 60 per cent of the required funds, while raising the remaining 40 per cent from equity. When a network business spends money on an asset, for example a new substation, the value of that substation is added to its regulatory asset base. The business’ regulatory asset base is the total value of all the capital investments it makes to supply consumers with electricity or gas. The value of the regulatory asset base is multiplied by the allowed rate of return to determine the total return on capital the network business can charge energy consumers. A good estimate of the rate of return is necessary to promote efficient prices in the long term interests of consumers. If the rate of return is set too low, the network business may not be able to attract sufficient funds to be able to make the required investments in the network and reliability may decline. On the flip side, if the rate of return of return is set too high, the network business may seek to spend too much and consumers will pay inefficiently high prices. What’s in the rate of return guideline? The guideline sets out the approach we use to estimate the returns on equity and debt for a benchmark efficient business. This approach supports the rate of return objective in the national electricity and gas rules. This is for the overall rate of return to correspond to the efficient financing costs of a benchmark efficient business. By setting a rate of return based on a benchmark, rather than the actual costs of individual businesses, network businesses have incentives to finance their business as efficiently as possible. We define the benchmark efficient business as one who only provides regulated electricity or gas network services, operating within Australia. This applies to both electricity and gas as the risks across both industries are sufficiently similar such that a single benchmark is appropriate. How do we estimate the return on equity? Recognising there is not one perfect model to estimate the return on equity, our approach draws on a variety of models and information. Our starting point is the standard Capital Asset Pricing model (CAPM)—our ‘foundation model.’ We then use a range of models, methods, and information to inform our return on equity estimate. We use this information to either set the range of inputs into the CAPM foundation model or assist in determining a point estimate within a range of estimates at the overall return on equity level. Our aim is to set a rate of return that delivers sufficient but not excessive returns to support investment in safe and reliable energy networks. The return on investment can make up approximately 50 per cent of revenue needs for network businesses. Our approach allows us to determine rates of return over time that reflect market conditions and in the long term interests of consumers. Our approach to the return on equity balances providing predictability for investors and consumers while incorporating the latest market dat

 

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