Summary

  • The Australian Energy Regulator has opened a targeted consultation through 23 October on the evidence for draft equity-beta and market-risk-premium inputs in its 2026 Rate of Return Instrument.
  • The Independent Panel did not say the proposed figures were wrong. It said the AER had not yet explained its judgment adequately, and the regulator’s new dividend-model analysis shows that a higher risk-free rate accounts for much of the apparent fall in implied market risk.
  • The final instrument is still targeted for December. The AER retains decision authority; neither the new paper nor the panel report changes network charges by itself.

The Australian Energy Regulator (AER) has added another formal submission window to its review of the 2026 Rate of Return Instrument. Published on 9 October, its post-draft discussion paper gives stakeholders until close of business on 23 October to address a narrow set of questions. The AER calls it a strict ten-business-day period. A final instrument is still targeted for December.

The instrument is a formula, but its inputs are judgments about risk. It sets how the AER will calculate allowed returns on capital for regulated electricity and gas networks. It binds both the regulator and network businesses for relevant determinations beginning in the four years after release. The AER says return on capital is typically around half of network revenue, so the method can matter to both future network costs and investment incentives. It is not a direct tariff order or a bill forecast.

The draft sets equity beta at 0.55, down from 0.6 in the 2022 instrument, within a proposed range of 0.4 to 0.7. Beta estimates how much systematic market risk a regulated network business carries. The draft also puts the market risk premium (MRP) at 6.1%, compared with 6.2% in 2022. The MRP is not directly observable; the AER estimates it and fixes the value in the instrument.

An Independent Panel, appointed under the national energy-law process and reporting by consensus in July, scrutinised the draft. It did not find that a beta of 0.55 or an MRP of 6.1% was inappropriate. Its objection was to the explanation: the beta range and point estimate were not fully reasoned, and the case for relying more on old domestic comparators than on international evidence was not made out. For the MRP, the Panel said the updated evidence did not persuasively justify a reduction, while allowing that 6.1% could be right if supported by a fuller rationale.

The AER’s new analysis shows why a model result needs interpretation. Its dividend growth model (DGM) estimates the return on equity implied by share prices and forecast dividends, then subtracts the risk-free rate to derive an implied MRP. Between the 2022 and draft-2026 periods, the average risk-free rate rose from 3.20% to 4.42%. That 1.22-percentage-point increase alone accounts for about two-thirds of the two-stage model’s MRP decline and more than the entire decline in the three-stage model.

Before subtracting the risk-free rate, the two models’ implied cost of equity moved in opposite directions: down 0.62 points in the two-stage version and up 0.27 in the three-stage version. Their post-year-three dividend-growth assumptions differ.

The new consultation asks how much weight the DGM deserves after that decomposition. On beta, it asks whether domestic firms should be treated equally, how international evidence and recent five-year estimates should be used, whether to add five European comparators, and whether to remove Hera Group because most of its energy revenue comes from sales and trading. These are evidence questions, not a vote on a predetermined outcome.

The submissions will join the evidence already received. The AER will make the final decision and says it will respond to the Panel’s recommendations in the final explanatory statement. Until then, the proposal remains open: the key test is whether the December instrument makes the path from sample and model to chosen return clear enough for investors, network businesses and consumers to examine.

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