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July 14, 2011
The Brattle Group Contributes to the Australian Energy Market Commission’s Report on Total Factor Productivity

The Australian Energy Market Commission (AEMC) has published the final report of its review into the use of total factor productivity (TFP), and is proposing new rules to enable the disclosure of more consistent and robust data by regulated utilities. The AEMC commissioned four reports from Brattle during its review: international case studies of the use of TFP in setting energy utility rates; a comparison of the incentive properties of TFP and building-block (or cost forecast) based ratemaking; options for reforming the current Australian framework; and a review of a paper on TFP prepared for the Victoria Essential Services Commission. Brattle concluded that information from TFP studies would be beneficial to regulators even if rates continued to be based on forecasts of the utility's own costs, and that in terms of strengthening incentives to control costs, the benefits of moving to formal TFP-based ratemaking are likely to be small. The AEMC found that TFP-based methods could help improve the process for setting rates for gas and electric distribution utilities, but that data reported by the utilities is not currently sufficiently detailed or robust to allow TFP methods to work. The AEMC is therefore proposing new rules to facilitate the collection of better data, which would also be valuable to the regulator under the current regulatory framework. The AEMC’s final report is available for download on the AEMC website.