Term of the Rate of Return - Pathway to Rate of Return 2022

On Wednesday, 22 September 2021, the AER published a final working paper on the Term of the rate of return & Rate of return and cashflows in a low interest rate environment. 

The final working paper sets out our positions and views on topics in the draft Term of the rate of return and Rate of return and cashflows in a low interest rate environment working papers after considering stakeholder submissions. We consider a single final working paper will reduce the duplication from having two final papers.

The final paper identifies two key areas that warrant further consideration and consultation: the term for the return on equity and term for the return on debt.

We also set out our preferred positions related to the Term of the rate of return:

• The term of rate of return and term for expected inflation should be independently assessed
• The term of equity and the term of debt do not need to align
• The trailing average return on debt should be maintained
• The debt term should match that of an efficient firm’s borrowing

This final paper marks the end of the working paper process for both topics, and there will not be an immediate round of stakeholder submissions. However, there will be further consultation on these issues at later stages of the 2022 review.