premium that compensates consumer price inflation, to take account of the fact that the regulated asset has already been indexed for consumer price inflation. We call on the AER to formally consider this in the determination of the WACC. Specific comments Averaging period for risk free rate I understand that the AER has agreed with the network service providers, the averaging period for the calculation of the risk free rate and that this agreed averaging period is confidential. I can see no compelling reason for such confidentiality: surely that AER is not suggesting that publication of the averaging period will affect the yield on 10-year Australian Government bonds? In the absence of a justification to the contrary, I suggest that the averaging period for the risk free rate should be as close as possible to the start of the regulatory control period and that it be made publicly available. Debt Credit rating The AER has said that it will use a BBB+ credit rating in setting borrowing costs. But the AER has actually used a broad BBB definition in establishing the benchmark. We call on the AER to consider how the allowed return on debt derived from its BBB benchmark should be reduced to reflect its chosen BBB+ benchmark rating. This is necessary not just for consistency with the AER’s benchmark, but also in view of the AER’s evidence that NSP debt is typically rated at BBB+ or higher. Tenor I do not agree that 10 years is the suitable tenor. I see no reason for extrapolation from 7 years, considering the AER’s evidence that weighted average NSP bond tenor is around
premium that compensates consumer price inflation, to take account of the fact that the regulated asset has already been indexed for consumer price inflation. We call on the AER to formally consider this in the determination of the WACC. Specific comments Averaging period for risk free rate I understand that the AER has agreed with the network service providers, the averaging period for the calculation of the risk free rate and that this agreed averaging period is confidential. I can see no compelling reason for such confidentiality: surely that AER is not suggesting that publication of the averaging period will affect the yield on 10-year Australian Government bonds? In the absence of a justification to the contrary, I suggest that the averaging period for the risk free rate should be as close as possible to the start of the regulatory control period and that it be made publicly available. Debt Credit rating The AER has said that it will use a BBB+ credit rating in setting borrowing costs. But the AER has actually used a broad BBB definition in establishing the benchmark. We call on the AER to consider how the allowed return on debt derived from its BBB benchmark should be reduced to reflect its chosen BBB+ benchmark rating. This is necessary not just for consistency with the AER’s benchmark, but also in view of the AER’s evidence that NSP debt is typically rated at BBB+ or higher. Tenor I do not agree that 10 years is the suitable tenor. I see no reason for extrapolation from 7 years, considering the AER’s evidence that weighted average NSP bond tenor is around
Bruce%20Mountain%20%28CCP2%29%20-%20Advice%20on%20AER%20preliminary%20decision%20and%20revised%20proposals%20from%20Energex%2C%20Ergon%20Energy%20and%20SA%20Power%20Networks%20-%20July%202015_3.docx