We welcome the opportunity to further participate in the Australian Energy Regulator’s (AER) Review (the Review) of the Rate of Return Guideline (the Guideline) and to comment on the Draft Rate of Return Guidelines: July 2018 (the Draft Guideline or Draft) (AER, 2018a) and the accompanying Explanatory Statement (the Statement). (AER, 2018b)

Our overall response to the Draft Guideline is that the evidence available to the AER justifies a rate of return lower than that which will apply as a consequence of the Draft. We acknowledge the AER’s concern that movement in the rate of return should not be too extreme in any individual review so that investor confidence is not unnecessarily disrupted, and that this is a valid consideration in exercising judgement in the choice of the allowed rate of return.

The direction of the AER’s decisions in relation to three key parameters – beta, Market Risk Premium (MRP) and gamma – are all supported by the evidence. However, we argue that (possibly motivated by a reasonable desire to deliver a Draft that was capable of acceptance by networks) the AER has chosen values for these three parameters that result in a rate of return which is in excess of the efficient finance costs of an efficient service provider.

In this submission we will first outline some observations about the overall approach of the AER to this review including the incremental approach, the Concurrent Expert Evidence Sessions, observations on the limitations of the Capital Asset Pricing Model (CAPM) and the way those limitations need to inform the use of the model in determining the allowed rate of return and a consideration of what the time period is over which returns are assessed.

The full submission can be read here.