On 20 September 2012, the AEMC published a final rule determination in respect of the consolidated rule change request from SP AusNet and ElectraNet on the assumed utilisation of imputation credits (gamma).

In its final rule determination the Commission has decided not to make a rule.

The AEMC’s reasons for not making a rule are related to it not being the role of the Commission to determine an appropriate value of gamma or any other parameter in a rate of return estimate. This role is more appropriately undertaken by the Australian Energy Regulator (AER) using the frameworks outlined in Chapter 6A of the National Electricity Rules (NER) to calculate the appropriate overall rate of return for these businesses.

A rule that allowed rate of return parameters to be amended outside of the existing framework would undermine the integrity of the framework and create regulatory risks, which may alter the underlying incentive arrangements for these transmission network businesses.

Background

On 18 November 2011, SP AusNet submitted the Varying Cost of Corporate Income Tax rule change request. Similarly, on 30 November 2011, ElectraNet submitted the Assumed Utilisation of Imputation Credits rule change request. As, both rule change requests concern the value of gamma (γ) that is applied to the coming revenue determinations for SP AusNet and ElectraNet, the Commission consolidated these rule change requests and treated them as one request.

In Chapter 6A of the NER, the weighted average cost of capital (WACC) is an estimate of the fair return on capital that investors (being debt holders and equity holders) in the benchmark firm might reasonably expect as compensation for having their capital at risk.

Under Chapter 6A the AER must conduct a review of the WACC parameters every five years. For some parameters, the specific values adopted in the review cannot be departed from in determinations over the subsequent five year period. These parameters include equity beta, market risk premium, gearing, credit rating, and gamma; the last of which is the subject of this rule change request. The last review was carried out in 2009 and the next one is scheduled for 2014.

The value of gamma has been subject to merits review by electricity distribution network service providers (DNSPs). As a result of merits review in the electricity distribution context, the Australian Competition Tribunal (Tribunal) has determined that the correct value of gamma for electricity distribution network service providers is 0.25, as opposed to 0.65, which was the AER determined value in its 2009 review.

Since the merits review of the gamma the AER has adopted the revised value of 0.25 in electricity distribution (and gas). The NER do not, however, permit the AER to consider applying the revised gamma to any transmission network service provider (TNSP) revenue determination until the next scheduled review of rate of return parameters (as noted above, scheduled for 2014).

This means that even if the AER considers that the gamma value determined by the Tribunal in the context of DNSPs is the correct value that should be applied for all network service providers, the AER must continue to apply the gamma value that it fixed in its 2009 review for electricity transmission.

A consultation paper was prepared by the staff of the AEMC to facilitate public consultation on this consolidated rule change request. Submissions on the consultation paper closed on 19 April 2012.

On 28 June 2012, the AEMC published a draft rule determination on the assumed utilisation of imputation credits. The draft rule determination proposed not to make a rule. Submissions on the draft rule determination closed on 10 August 2012.