Demand from non-resident investors is high The AER accepts that demand for CGS from non-resident investors has increased over the past few years and non-resident investors now hold a large portion of CGS. This conclusion is supported by the RBA in its advice to the AER: Within the Australian market, one notable source of demand for risk-free assets has come from non-resident investors, whose holdings of CGS now comprise more than three-quarters of outstanding supply. The number of AAA rated sovereigns globally has fallen over the past few years. The Treasury and AOFM note that 'Australia is currently one of only eight sovereigns to have a AAA rating with a stable outlook from all three major credit rating agencies.' The AER does not consider an increase in demand for CGS from non-resident investors, and subsequent decline in CGS yields, suggests a short averaging period is inappropriate. In the WACC Review final decision (2009), the AER stated its position that the benchmark firm operates in markets that inevitably include non-resident investors. The Joint Industry Association also considered this to be appropriate in a submission on the topic: (A)ny empirical domestic data on the risk-free rate, MRP, equity beta and gamma parameters have, or will certainly continue to be influenced by, both domestic and international investors. While the WACC Review is not binding in a gas context, the AER continues to hold this view. Increased non-resident ownership of CGS is reasonable in today's global markets. The increase in demand for CGS from non-resident investors is likely to reflect the low risk nature of CGS and the deep and liquid AAA-rated market. Basel III requirements are placing huge demands on the CGS market The AER accepts that Basel III requirements are imposing requirements on the way an Authorised Deposit-taking Institution (ADI) manages its risk. However, the AER does not accept that Basel III requirements are placing undue strain on the CGS market. The effect of the Basel III requirements is to require these institutions to hold quantities of liquid assets on their balance sheet large enough to withstand a 30-day stress scenario. CEG argued that these requirements are placing strain on the CGS market.
CEG also referred to a speech by Guy Debelle, Assistant Governor of the Reserve Bank, in which he describes the creation of the Committed Liquidity Facility. CEG submitted that the creation of this facility demonstrates that the CGS market is constrained. CEG stated: Importantly, Assistant Governor Debelle was clearly expressing the view that the liquidity premium in the CGS market was, in November 2011, at historically very high levels (and seemingly well in excess of 15bp). The implementation of Basel III can be expected to ensure that this remains so in the foreseeable future. The Committed Liquidity Facility was in fact created for the very purpose of ensuring the CGS market continues to function well: Specifically, the creation of a committed liquidity facility (CLF) by the Reserve Bank is intended to prevent a situation in which the liquidity in the CGS market is impaired or in which the premia attached to CGS are increased beyond reasonable levels. The AER accepts this advice that the CGS market will continue to function well in the presence of Basel III requirements. Furthermore, Assistant Governor Debelle's comments suggest that, over the years prior to the onset of the GFC, the liquidity premium may have been unusually low. Advice from the RBA and Treasury in 2007 suggested the use of nominal CGS as a proxy for the risk free rate was appropriate. The AER does not consider it appropriate to attempt to determine an average, or 'normal', liquidity premium and only accept prevailing CGS when the observed premium is equal to the 'normal' premium. The AER has confidence those authorities understand the requirements in their jurisdiction and have put in place adequate measures to address potential concerns. The AER concludes that the current demand for CGS does not undermine its usefulness as a proxy for the risk free rate. CEG contention: There is a shortage of supply of CGS in Australia The AER does not accept that there is a shortage of supply of CGS in Australia. Consequently, the AER does not accept that there is a 'scarcity premium' included in CGS yields. As discussed in attachment 4.3.2 above, the Australian Government has a stated position recognising the need to ensure sufficient CGS are available to maintain liquidity in the market. CEG made the following statement:
Commodity price forecasts The AER considers BIS Shrapnel's oil price forecasts do not represent the best forecast possible in the circumstances. BIS Shrapnel used futures prices to forecast oil prices. The AER has accepted this method of forecasting in past decisions. However, given new evidence, the AER considers that this approach is no longer reasonable nor the best possible in the circumstances. The AER also considers BIS Shrapnel's PE pipe price forecasts were not arrived at on a reasonable basis, and do not represent the best forecast or estimate possible in the circumstances. Oil Generally the AER has considered prices in futures markets provide a reasonable basis to forecast commodity prices. BIS Shrapnel used Chicago Mercantile Exchange (CME) futures prices to forecast oil prices. However a recent discussion paper from the Federal Reserve round that: More commonly used methods of forecasting the nominal price of oil based on the price of oil futures or the spread of the oil futures price relative to the spot price cannot be recommended. There is no reliable evidence that oil futures prices significantly lower the MSPE relative to the no-change forecast at short horizons, and long-term futures prices often cited by policymakers are distinctly less accurate than the no-change forecast. The no–change forecast is a forecast that predicts future prices will be the same as the current price. The paper also noted that over horizons of several years the no change forecast adjusted for expected inflation was a better predictor of nominal oil prices than futures, expert economic forecasts, and the unadjusted current price of oil. It is also noted in the paper that: This result is consistent with common views among oil experts. For example, Peter Davies, chief economist of British Petroleum, has noted that “we cannot forecast oil prices with any degree of accuracy over any period whether short or long” The AER is not satisfied the proposed oil price forecasts represent the best forecast possible in the circumstances. Based on this new research, the AER considers the best forecast or estimate possible in the circumstances is the expected change in the CPI.
retrospective period. The errors demonstrated that Envestra charged thousands of dollars for service orders that AGL did not even raise. AGL submitted that because there is a three month limit on Retailers disputing their network charges, Envestra refused to refund those amounts in SA and Qld even though AGL was charged in error. Origin submitted that clause 29.5 contains a three month limitation period, where statutory limitation periods could apply, or at least a six month period in light of the two month billing cycle. Envestra was not amenable to the proposed revision. uncertainty and promotes the efficient operation and use of gas services, aspects of the NGO. The AER notes that the time limit commences once the claim becomes known or should have become known. The AER considers that this protects the Network User whilst imposing a constraint aimed at ensuring the efficient provision of services. 32.1 Information AGL submitted that rule 94 of the NERR, covers assistance and cooperation. This subject matter should default to NECF in the same way other provisions have. Envestra was not amenable to the proposed revision. The AER notes that NECF does not presently apply in Victoria. Whilst (once it is adopted in Victoria) NECF will govern key aspects of information sharing, it will not cover every aspect. The AER considers that clarifying the parties’ obligations with respect to information sharing and provision is beneficial. This creates clarity and avoids uncertainty. The AER considers this to be consistent with the NGO as it promotes efficiency in the provision of services. 32.3 Consultation AGL submitted that Envestra should be subject to the same 'assistance and or cooperation', and no cost and in a timely manner obligations as are imposed on Network Users in clause 32.2. Envestra stated that this clause does not state that it will charge a fee. The AER does not consider that it is necessary for this clause to be reciprocal. Clause 32.2 provides for the Network User to obtain information or action from third parties. This requires Envestra to provide information to a third party. It is unlikely that Envestra will need to obtain information or action from a third party in the way a Network User will. Accordingly, it is not necessary for the clauses to be reciprocal.