Data released by the Australian Energy Regulator (AER) in July 2022 shows that the actual returns received by electricity networks from 2014 to 2021 are consistently higher than the normal level of return. The total extra profit above normal levels, or supernormal profit, extracted by network businesses over the eight-year period was $10 billion. The actual profit received was 67% higher than the normal level of profit.

Distribution and transmission network service providers in the National Electricity Market (NEM) are natural monopolies because it is not efficient to build multiple electricity networks alongside one another. To ensure that the networks do not exert monopoly pricing power, the AER regulates the prices networks charge consumers. The AER is responsible for making sure that networks charge consumers only what is required to cover the costs of investing in, building, maintaining and operating the networks, plus a reasonable profit to ensure compensation for investors.

In IEEFA’s view, the observed persistent sector-wide supernormal profits do not appear consistent with the revenue and pricing principles set out in the National Electricity Law, the National Electricity Objective, or the AER’s objective of ensuring that consumers pay no more than necessary for network services.

The supernormal profits issue needs to be examined and rectified. IEEFA has presented a range of recommendations in this report. If this situation is not improved, energy consumers will continue to pay more than required for electricity distribution and transmission network services.