AER - Historical Excess Returns - 2 November 2022

25 October 2022

In response to one of the Independent Panel’s central recommendations, we engaged CEPA to update its May 2021 report on Regulated Asset Base (RAB) multiples. Given this material extends the consideration in our draft decision, we think it important to hear from stakeholders before we make our final decision.

Written submissions should be emailed to RateOfReturnaer [dot] gov [dot] au (RateOfReturn[at]aer[dot]gov[dot]au) and will close on Wednesday, 9 November 2022.  

2 November 2022

The Independent Panel recommended that we consider the extent to which some of the rate of return parameters may have been impacted by the low interest rates and quantitative easing which is now being unwound. To this end, they suggested that we seek expert advice.

We sought advice from the Reserve Bank of Australia and the Australian Commonwealth Treasury (The Treasury). This correspondence is now published.

Having regard to The Treasury advice the alternative options for estimating the market risk premium (MRP) include:

• No change to our current approach in the draft determination, which uses Historical Excess Return (HER) data to December 2021
• Adopt HER data up to December 2019
• Adopt HER data up to September 2022, given that is the latest available data
• Adopt HER data up to December 2022.

Adopting HER data up to December 2022 could be done using two alternative approaches:

• delaying the 2022 RORI into 2023 until the full calendar year data is available
• including a formula in the 2022 RORI that can be mechanically applied that calculates the HER after the full calendar year data is available. This option, all else being equal, may not require a delay to our 2022 RORI.

We have published updated data on HER that is consistent with the options available to us so that stakeholders can make an informed submission on the data we should use to estimate the MRP for the 2022 RORI.

We therefore invite stakeholders to make submissions on if and how we should adjust the HER sample period considering The Treasury advice.

Written submissions should be emailed to RateOfReturnaer [dot] gov [dot] au (RateOfReturn[at]aer[dot]gov[dot]au) and will close on Friday, 25 November 2022.

9 November 2022

As part of the Energy Networks Australia's submission on our draft Rate of Return Instrument, we received a report from Professor Richard Schmalensee that commented on our draft decision on the term of equity. In response, to assist the AER Board make its final decision on this issue, AER staff developed a note. We also sought and received clarification from Professor Schmalensee. Additionally, we received a response from Dr Martin Lally and comments from Dr Glenn Boyle.

We are not inviting submissions on this material, as it relates to an issue considered in our draft decision and raised in submissions.

This material is published below for stakeholders’ information.

14 November 2022

The AER has decided  to delay the publication of the 2022 Rate of Return Instrument until February 2023. The delay will allow us to consider the submissions made in the final instrument and avoid closing off options currently available.

The 2018 Rate of Return Instrument remains in force until it is replaced. However, publishing the new instrument in February 2023 will allow it to apply to our next set of regulatory decisions in April 2023.