Return on Capital

Our Regulatory Asset Base (RAB) is the value of all the assets we use in providing distribution services.

This value represents the—as yet—unrecovered capital investment we have made in the past, to provide services to our customers now and in the future.

The value of the RAB changes over time. It increases with every investment in new assets, and falls as we depreciate existing assets over time. We also index the RAB in accordance with regulatory processes. Finally, when customers make capital contributions to these assets, or we dispose of them, the proceeds are subtracted from the overall value.

To calculate the opening value of the RAB for the next regulatory period, we will use an approach that is consistent with the National Energy Rules (NER), and the Australian Energy Regulator’s ‘roll-forward’ models. These models capture our actual and forecast net-capital expenditure and depreciation.

Our RAB as of 30 June 2023 is $1.72 billion (Nominal $).

Figure below shows How the Regulatory Asset Base is calculated.

Revenue Building Blocks

As we are a regulated business, through a Regulatory Proposal we are required to make an estimate of:

• how much revenue we will need to cover our costs
• how much we need to invest for the future and
• provide a return to our shareholders.

The Regulatory Proposal that we will develop for the 2026-31 period is calculated using the Australian Energy Regulator’s Post-Tax Revenue Model. In this model, total revenue is estimated as the sum of a number of different types of costs we know as ‘building blocks’

As we are a regulated business, we are required to make an estimate of how much revenue we will need to cover our costs, invest for the future and provide a return to our shareholders. The Regulatory Proposal will use the Australian Energy Regulator’s Post-Tax Revenue Model. In this model, total revenue is estimated as the sum of a number of different types of costs we know as ‘building blocks.’

Figure below shows the revenue building blocks.

Depreciation–return of capital

We do not recover our capital expenditure in the year we spend because of its lumpiness and its benefits are realised over many future years. For example, brand new step-down transformers might cost $100,000 and we recoup the costs for them over 40 years. Instead, we recover these costs over the economic life of these assets. This recovery of investment is referred to as return of investment. We calculated this allowance using an approach that is consistent with the National Energy Rules and also the Australian Energy Regulator’s Post-Tax Revenue Model. In addition to depreciating assets due to ageing, the Australian Energy Regulator’s Post-Tax Revenue Model also increases their value to account for the impact of inflation.

Operating expenditure

Operating expenditure is a significant part of our building block revenue and covers the costs associated with operating our electricity network. This includes operational staff, maintenance of equipment and investments.

Incentive scheme arrangements

The Australian Energy Regulator applies a range of incentive schemes to electricity distribution businesses. As a result of our performance against these incentives, we will either receive a reward or penalty in our revenue. For some schemes, the reward or penalty is received within a regulatory period, for other schemes, the rewards and penalties are recovered in the next regulatory period.

Corporate income tax

Corporate income tax represents what we forecast our income-tax liabilities to be over the next regulatory period. To calculate this allowance, we have used the value of imputation credits determined by the Australian Energy Regulator as a part of the rate of return guideline. The amount of corporate tax allowance is estimated by multiplying the corporate tax rate by taxable income.

Proposed shared-asset revenue reduction

A small number of assets we use to provide regulated services are also used to provide unregulated services. This includes renting out part of our poles to telecommunications providers. We reduce our revenue to reflect the portion of the telecommunications rental income, which benefits our customers.

Total revenue requirement

As a matter of process we bring these building block components together to determine our revenue requirement. At this point, the amounts can be quite varied from year to year and so, to avoid volatility, we undertake a process of smoothing to flatten out our revenues. To smooth revenues, we make adjustments to total revenues between years by taking into account the time value of money, but making sure the present value is unchanged.

Our operational expenditure in a snap shot

• Replacement: Replacing parts of the network that have reached the end of their technical life, in order to maintain service levels.
• Connections: Building or upgrading the network to connect new customers.
• Augmentation: Increasing the capacity of the network to meet customer demand. We consider augmentation in two parts:
• Non-network: Information technology, property, fleet and other non-network assets which enable the delivery of services.

— Demand driven augmentation: more electricity is needed, so we need more network

— Non-demand driven augmentation: where the electricity network has to respond to changes in technology and regulatory or legal requirements. Increasing the amount we can import into the grid is an example of this.