The AER incorrectly combines the 'spot' risk free rate from Attachment 5 method 1 with the long-term average MRP from method 2. Either of the two methods would be appropriate, but mixing Appendix B.3.1 the two is not. Current market circumstances are unusual; there is a 'flight Appendix B.3.1 to quality' effect on the CGS. Attachment 5.3.3 AER’s MRP estimate is a long term historic average. Appendix B.5 Survey results used by the AER reflect a period when the Appendix B.5.2 risk free rate was substantially higher than the current spot rate. Attachment 5.3.3 It is commonly accepted the MRP varies over time, however, the AER’s MRP estimates do not change. Appendix B.5 Fund managers noted the AER’s overly mechanistic approach produced unprecedentedly low cost of equity Appendix B.5 estimates and they do not meet the current market conditions. Regulatory precedent from IPART and the UK suggests that Appendix B.8 the adoption of a long-term average is appropriate. The AER's reasonableness checks are out of date and provide no meaningful information about the relationship Appendix B.7.2 between investors' required returns and the AER's estimate of the cost of capital. The present value principle as described by Lally relies on Appendix B.3.1 overly simplistic assumptions that do not apply in practice. AER has given no consideration to the asymmetric and Attachment 5.2.1 adverse consequences that would arise if the cost of capital were set too low.
The AER incorrectly combines the 'spot' risk free rate from method 1 with the long-term average MRP from method 2. Either of the two methods would be appropriate, but mixing the two is not. Attachment 5 Appendix B.3.1 Current market circumstances are unusual; there is a 'flight to quality' effect on the CGS. Appendix B.3.1 AER’s MRP estimate is a long term historic average. Attachment 5.3.3 Appendix B.5 Survey results used by the AER reflect a period when the risk free rate was substantially higher than the current spot rate. Appendix B.5.2 It is commonly accepted the MRP varies over time, however, the AER’s MRP estimates do not change. Attachment 5.3.3 Appendix B.5 Fund managers noted the AER’s overly mechanistic approach produced unprecedentedly low cost of equity estimates and they do not meet the current market conditions. Appendix B.5 Regulatory precedent from IPART and the UK suggests that the adoption of a long-term average is appropriate. Appendix B.8 The AER's reasonableness checks are out of date and provide no meaningful information about the relationship between investors' required returns and the AER's estimate of the cost of capital. Appendix B.7.2 The present value principle as described by Lally relies on overly simplistic assumptions that do not apply in practice. Appendix B.3.1 AER has given no consideration to the asymmetric and adverse consequences that would arise if the cost of capital were set too low. Attachment 5.2.1
Envestra%20-%20Final%20Decision%20-%20Part%203_0.docx