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Note This overview forms part of the AER's final decision on ActewAGL’s distribution determination for 2015–19. It should be read with other parts of the final decision. The final decision includes the following documents: Overview Attachment 1 – annual revenue requirement Attachment 2 – regulatory base Attachment 3 – rate of return Attachment 4 – value of imputation credits Attachment 5 – regulatory depreciation Attachment 6 – capital expenditure Attachment 7 – operating expenditure Attachment 8 – corporate income tax Attachment 9 – efficiency benefit sharing scheme Attachment 10 – capital expenditure sharing scheme Attachment 11 – service target performance incentive scheme Attachment 12 – demand management incentive scheme Attachment 13 – classification of services Attachment 14 – control mechanisms Attachment 15 – pass through events Attachment 16 – alternative control services Attachment 17 – negotiated services framework and criteria Attachment 18 – connection policy Attachment 19 – pricing methodology Attachment 20 – analysis of financial viability
Return on debt Previously, we used an on-the-day approach to determine the return on debt. This is the approach that many Australian regulators continue to use. However, for this decision, we have determined a return on debt estimate that gradually transitions from an on-the-day approach to a trailing average approach. This is consistent with the views most stakeholders expressed during the Guideline development process. We note that, ActewAGL supported by some other distributors, did not agree on the transition to the trailing average approach. ActewAGL proposed that we use a backwards looking approach to move from the approach to the trailing average approach. This involved using data from the last ten years to set the return on debt for the 2015–19 regulatory control period. We disagree. Instead we have determined a gradual, forward looking transition to a trailing average. As mentioned in section 1.2, rate of return is the most material revenue difference between our final decision and ActewAGL's revised proposal. We summarise our reasons in some detail below. We are satisfied that a gradual, forward looking transition to a trailing average approach results in a return on debt that contributes to the rate of return objective. In particular, this approach takes account of any impacts on a benchmark efficient entity or customers that might arise as a result of changing the methodology that is used to estimate the return on debt. This includes impacts that occur across regulatory control periods. In particular, a gradual, forward looking transition: Has regard to the impact on a benchmark efficient entity of changing the method for estimating the return on debt Promotes efficient financing practices consistent with the principles of incentive based regulation Provides a benchmark efficient entity with a reasonable opportunity to recover at least the efficient financing costs it incurs in financing its assets. And as a result it: Promotes efficient investment, and Promotes consumers not paying more than necessary for a safe and reliable network Avoids a potential bias in regulatory decision making that can arise from choosing an approach that uses historical data after the results of that historical data are already known Avoids practical problems with the use of historical data as estimating the return on debt during the global financial crisis is a difficult and contentious exercise. Return on equity Our approach to determining the return on equity involves considering all of the information before us, through a six step process as set out in the Guideline