Consultation paper Rate of return guidelines - Australian Energy ...

We consider the requirements of the rate of return objective and the rate of return provisions in the
rules to be quite broad. The factors which we are required to have regard to are not necessarily
prescriptive of particular outcomes 35 . Rather they set out the matters that we are required to take into
account under the law and the rules when making a determination.
It is feasible that various estimation methods, financial models, market data and other evidence may
meet some, but not all, of the specific requirements of the new rate of return provisions. To this end,
potential approaches may address the rate of return provisions well in some areas, and less well in
other others.
Taking into account stakeholder submissions and feedback\, we are proposing to use a defined set of
criteria in making judgements about the estimation methods, economic models, market data and other
evidence we will take into account in determining the allowed rate of return.
These criteria are not intended to supplant the new rules. Rather, we consider that these criteria are
subordinate to the laws, principles and rules set out in the NEL, NGL, NER and NGR. We consider
these criteria are consistent with the law and rules. They also help us frame how we ensure that
regulatory outcomes meet the national gas and electricity objectives. We consider that these criteria
will provide stakeholders with greater certainty, and indeed provide a framework, as to how we intend
to exercise our regulatory judgment in respect of this information, while allowing flexibility and
adaptability for us to make decisions in changing circumstances.
We will use these criteria to assess whether information and data presented to us is appropriate and
relevant for making decisions on the rate of return. We will use the criteria to give weight to data that
is deemed relevant for estimating the allowed rate of return and ensure that we are meeting the
national electricity objective. Data and other evidence that meets only some of the criteria may be
given less weight or have no weight placed on it. The criteria will therefore help us to make regulatory
judgements in respect of meeting the rate of return objective.
It is important to remember that different models, financial methods and information have different
purposes. It is therefore paramount to determine what those purposes are before deciding if such
information should be used to set a rate of return for regulated service providers. For example,
takeover reports are produced by entities to asses if a takeover offer is fair and reasonable. Valuation
agents produce a cost of capital to discount revenues into perpetuity. Further examples might be
brokers' reports. A typical broker’s report is unlikely to be useful at the parameter level—that is not its
purpose—but it may be useful in regard to the return on equity. Considering such information at the
return on equity level would require us to interpret the information having regard to the purpose for
which it was compiled and whether the information generated was useful for establishing a regulatory
rate of return for service providers. Put simply, the purpose will determine what role the information
will play and how we will use it.
We intend to use the criteria to set out in the guideline the estimation methods, financial models,
market data and other evidence relevant to establishing the allowed rate of return.
However, at the time of an individual service provider's determination, the criteria will also be used by
us to assess any information provided by that service provider that supports or departs from the
methods, financial models, market data and other evidence established in the guideline. The criteria
are:
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NER, clause 6.5.2(e), (g), (i), (k), (l) and clause 6A.6.2(e), (g), (i), (k), (l); NGR, r. 87(5), (7), (9), (10), (11), (12).
Better Regulation – Rate of return guidelines – Consultation Paper – May 2013 20