Our draft decision is to apply our current method rather than to use the breakeven approach. We consider there are clear limitations to using breakeven approaches that result in biased estimates of expected inflation unless particular adjustments are made to these estimates. We outlined these potential adjustments in Table 3-25 in Attachment 3 to our final decision on AusNet Services 2016–20 distribution determination. So far, no stakeholder has put any material before us to discuss the limitations of the breakeven approach or how to adjust for them. Without consensus on the appropriate methods for addressing these limitations, the breakeven approach may increase uncertainty and the potential for bias as a result of regulatory gaming, relative to our current approach based on RBA forecasts. Further, market imperfections can undermine the ability of breakeven approaches to estimate the market's inflation expectations. Despite having improved since 2007, we consider that the size and liquidity of the market for indexed Australian government bonds is still limited and may cause biases in breakeven inflation estimates. Given the information currently before us, and considering the limited amount of consultation we have been able to undertake on a parameter that should apply to all service providers, we are not satisfied that changing our approach would improve our estimates of expected inflation.
Our draft decision is to apply our current method rather than to use the breakeven approach. We consider there are clear limitations to using breakeven approaches that result in biased estimates of expected inflation unless particular adjustments are made to these estimates. We outlined these potential adjustments in Table 3-25 in Attachment 3 to our final decision on AusNet Services 2016–20 distribution determination. So far, no stakeholder has put any material before us to discuss the limitations of the breakeven approach or how to adjust for them. Without consensus on the appropriate methods for addressing these limitations, the breakeven approach may increase uncertainty and the potential for bias as a result of regulatory gaming, relative to our current approach based on RBA forecasts. Further, market imperfections can undermine the ability of breakeven approaches to estimate the market's inflation expectations. Despite having improved since 2007, we consider that the size and liquidity of the market for indexed Australian government bonds is still limited and may cause biases in breakeven inflation estimates. Given the information currently before us, and considering the limited amount of consultation we have been able to undertake on a parameter that should apply to all service providers, we are not satisfied that changing our approach would improve our estimates of expected inflation.
AER%20-%20Draft%20decision%20-%20Powerlink%20transmission%20determination%20-%20Attachment%203%20-%20Rate%20of%20return%20-%20September%202016.docx