The AER released its final rate of return decision for regulated electricity and gas transmission and distribution businesses on Monday. At 420 pages – the decision is thorough – but to save you reading it over Christmas, here is the cliff notes version:
Overall, the allowable rate of return is modestly reduced from 5.76% to 5.36%;
Assumed gearing stays at 60%, with the cost of debt virtually unchanged at 4.70% vs 4.77%;
The ten year averaging process remains in place. Utilities will continue to benefit from having regulated returns set on the assumption that they borrow using long-term debt (ten year assumed debt term), where most assets have a large portion of funding on much shorter three and five years terms (for example, see the maturity structure in the Ausgrid refinancing this quarter in the table above); and
Most of the action is in the cost of equity, where the assumed equity risk premium, asset beta and allowance for imputation credits are all changed slightly. Assumed return on equity is 6.36% down from 7.25%.
Overall, we see this decision as a modest continuation of the general approach of the AER under Paula Conboy. While there is some huffing and puffing by networks in the papers over the past day or so – the market’s judgement on this regulatory decision is pretty clear, with listed regulated utilities rallying on the news.