CAPM and alternative return on equity models - Pathway to Rate of Return 2022

  • Accepting submissions
Rate of return
Date completed: 
31 December 2020
Date initiated: 
27 August 2020
Effective date: 
31 December 2020
General enquiries - Rate of return
AER reference: 


This is the third in a series of working papers that we will produce as part of our pathway to the 2022 Rate of Return Instrument. The outcomes from these working papers will feed in to the active phase of our 2022 rate of return instrument review. This information will assist us to set a rate of return that contributes to the achievement of the National Gas Objective and National Electricity Objective. 

The draft working paper evaluates a number of models that could be used to inform our estimate of the return on equity, which is one component of the overall rate of return. This includes the Capital Asset Pricing Model (CAPM), which was the primary model used in the 2018 rate of return instrument. The working paper identifies strengths and weaknesses of the candidate models and asks for stakeholder feedback on which model/s should be used in the 2022 rate of return instrument.

This topic was selected because it goes to the foundation of our return on equity approach. Resolving which return on equity model/s are appropriate for regulatory use ahead of the main review would allow efficient consideration of subsequent matters, such as the input parameters for the chosen model/s.

Invitation for submissions

We are now seeking submissions from interested stakeholders on the CAPM and alternative return on equity models draft working paper by Friday 9 October 2020.

Online forum

There will be an online forum on the draft working paper from 2-5 pm on Wednesday 16 September 2020. This will be a joint forum that also covers our second working paper, International regulatory approaches to rate of return. Participants interested in attending the forum should email to register their attendance and receive online connection details.

The AER’s expert advisors, Dr Toby Brown (from The Brattle Group) and Professor Graham Partington, will answer stakeholder questions for 45 minutes during the forum. We request that stakeholders submit questions in advance. The AER will choose questions from each stakeholder segment. Questions should be emailed to by 10 am on Monday 14 September 2020.