AER’s regulatory treatment of inflation draft paper

PIAC lodged a submission to the Australian Energy Regulator (AER) on its draft paper concerning its regulatory treatment of inflation. 

PIAC considers any change which materially shifts the risk between consumers, businesses and investors must be backed by thorough modelling showing how this is in consumers’ interests. 

PIAC does not support changing to a (typically) 5-year term over which to estimate expected inflation. We consider the current approach remains appropriate (using a 10-year period to match the inflation estimate term with the term of the rate of return estimate). 

An important feature underlying many aspects of the regulatory framework for network businesses is that, while there may be small deviations of mismatches in particular aspects or from year to year, there is no structural bias inherent in the framework (i.e. swings and roundabouts). We are concerned that moving to a 5-year term at this point may introduce a structural bias against consumers’ interests.