Ending the capex arms race: Making networks solely accountable for what they forecast and deliver

A summary of Dr Ron Ben-David's May 2026 Monash Energy Institute paper, Regulating energy networks without the regulator – Chapter 1: Capital Expenditure"

Thirty years into incentive-based regulation, when it comes to the efficient level of capital expenditure, the Australian Energy Regulator (AER) determines everything and delivers nothing, while network operators deliver everything and determine nothing. That is the misalignment of responsibilities and risks at the heart of a new paper from Dr Ron Ben-David. It argues the solution is not another regulatory workaround — it is to remove the regulator from the business of forecasting, reviewing and authorising capex altogether.

An arms race nobody is winning

Ben-David traces how a framework designed to mimic competitive discipline has degenerated into a strategic contest of forecasts. Networks fortify their proposals, the AER fortifies its analytics, abd consumers fund both sides. He identifies ten regulatory lines of defence that have been put in place to guard against inefficient capital expenditure — more levels of redundancy, the author notes wryly, than a Boeing 747's critical systems. Despite that machinery, the gap between initial proposals and final allowances keeps widening, and the AER itself has flagged the rising regulatory cost of examining networks’ proposals.

Why the Capital Expenditure Sharing Scheme (CESS) contributes to the problem it claims to solve

The CESS — the ninth line of defence — receives close treatment in the paper. The AER's 2021–23 review found the CESS efficient on the basis that observed underspends generated consumer benefits. Ben-David is critical: the review asserted causation rather than demonstrating it, ignored the asymmetric effect of the ex post review threat, and dismissed the most obvious explanation for this persistent pattern— that networks rationally overstate their forecasts in order to upwardly influence the capital allowance approved by the AER. If they succeed, they get to bank the difference when their actual spend lands below the regulator’s allowance. Quoting consumer submissions, he endorses the verdict that "the CESS is the problem that the CESS is trying to fix". By formally rewarding underspends regardless of their provenance, the scheme has made deliberate mis-forecasting by networks a feature, not an unintended consequence.

A scheme that internalises honesty and efficiency

Part three sets out a stylised redesign — offered as illustration, not prescription. It is based on replace the regulator's forecast with the network's own forecast as the reference point for capital expenditure. He then adds two controls:

• a penalty for any ex post gap between the network’s forecast and out-turn capital expenditure. The penalty operates symmetrically, so a network minimises expected penalty only by submitting its true internal expectation of capital expenditure; and

   

• an efficiency variable measured at the level of the network (utilisation, performance, service quality, or a composite measure), that lifts the pay-off curve for operators when network efficiency improves and lowers the available pay-offs when efficiency declines.

   

Together, these modifications convert the CESS into a mechanism where the optimum strategy is for a network operator to say what it will do, do what it has said, and pursue genuine network-level efficiency gains. 

What this means for the regulator's role

Under the modified scheme the regulator no longer forecasts, reviews or authorises capex. It role is to set the strength and balance of incentives — the control variables governing the sharing ratio, the honesty penalty and the efficiency lever. Most of the ten lines of defence become redundant can be scrapped, significantly reducing the cost of regulation. The framework shifts decisively from assessing inputs to rewarding outcomes.

The shibboleth

Ben-David makes clear his model is illustrative only and it could take many possible forms; his point is that it possible to design such a scheme. Perhaps the harder question is institutional. For it to work, the AEMC and AER must accept their own redundancy in the capex space — accept that regulatory forecasts of efficient capex are not needed when networks bear the full risk of mis-forecasting their own requirements. His closing line is pointed: it is time for the regulatory authorities to rethink how they think — and if they cannot, someone needs to do it for them.

Dr Ben-David’s paper can be found at: https://www.monash.edu/__data/assets/pdf_file/0006/4335828/Ron-Ben-David-Regulating-energy-networks-without-the-regulator-May-2026.pdf