This submission responds to the Australian Energy Regulator’s (AER) process to set an equity beta for use in its Rate of Return Guideline for energy network service providers. The equity beta is a key input parameter to the AER’s foundation model for assessing the regulated return on equity, the Sharpe-Lintner capital asset pricing model. The return on equity is, in turn, a key component of the energy network prices that flow through to consumer’s bills.
In the submission, PIAC highlights the importance of the AER’s decision on the allowed rate of return to achieving a fair and balanced outcome for all stakeholders in accordance with the National Electricity Objective, the National Gas Objective, the Revenue and Pricing Principles and the National Electricity Rules and National Gas Rules. PIAC also asserts that the AER has not exercised its discretion appropriately in selecting a point estimate for the equity beta of 0.7 from a range of 0.4 to 0.7. The submission states that the AER’s decision reinforces PIAC’s deep concerns with the practical application of the AER’s approach to using other models and data to inform or guide their decision on the return on equity.