EUAA Submission: Regulatory Treatment of Inflation
Emily Wood | July 29, 2020
‘This submission begins with some general comments including discussions with the Consumer Reference Group. It then responds to the specific questions asked by the AER in its Discussion Paper.
On the basis of the evidence presented so far, we see no reason to change from our position of support for the AER’s Final Decision in the 2017 review1 that retained the current AER methodology to measure expected inflation. Further, we see a review of expected inflation as the wrong forum to decide whether there should be a move away from the current real return framework. That question is one that better sits as part of the forthcoming review of the rate of return binding guideline where it can be considered in the context of the overall risk allocation between networks and consumers.
While some flexibility is important for exceptional circumstances, good regulatory practice is built on consistency and predictability. Both investors and consumers place a high value on these system attributes. This starting point is that there must be a very good reason for change such that the “bar” for change should be set relatively high to ensure that any change is enduring and unambiguously in the long-term interests of consumers. We also need to ensure that the transactions costs of the change do not swamp the proposed benefits and so that if unexpected adverse impact occurs in the future, there are still net benefits. It is worth remembering that the current approach came about in 2008 because of a network’s dissatisfaction with the previous bond breakeven approach.’
Please download attached to read full submission.