Dr Martin Lally (Capital Financial Consultants) -The appropriate term for the allowed cost of capital - April 2021

On 21 May 2021 the AER published a working paper on Term of the rate of return. The working paper seeks to:

• Identify a suitable term for setting an efficient rate of return that contributes to achieving the NGO and NEO.
• Examine if the terms for the return on equity, return on debt and expected inflation should align.
• Ascertain the effect of a trailing average return on debt on the choice of term.

To help us understand finance theory and practice, we commissioned expert advice from Dr Martin Lally.