Summary of CRG and ENA current perspectives on elements of the RoR Guideline Cells coloured pink are promoted by that group for consideration at the concurrent evidence sessions. Cells coloured green have been nominated by that group as potential low hanging fruit. NOTE: Gearing is most significant gap. Prepared by David Havyatt 1 Feb 2018 Component CRG ENA Proposed priority of issue being discussed in concurrent evidence session The concept of risk and how to compensate for it What is the concept of risk in corporate finance? Propose discuss at a joint Experts Session? Risks actually faced by providers What impacts investor confidence and how to measure/take account of it when with a range of possibilities? What risk should the rate of return compensate? How can the risk of businesses providing regulated services be estimated? How should the changing risk profile by networks be taken into account in the regulatory framework? High Differences in between providers Propose discuss at a joint Experts Session? Data How do you deal with inadequate data? How best to deal with a range of outcomes and picking a point estimate? Can the foundational model be converted to a ‘formula’ (e.g. to address the concept of ‘’being informed by’) or does it just reconcile to point estimates? How should the AER pick the estimate from a range of equity Where does the balance between judgement and data lie, and how precisely can we seek to estimate rate of return parameters objectively, and in a way that can be replicated independently by any stakeholder, using market data? Medium
can be informative in setting the point estimate? reliability of equity beta estimates used by the AER be improved? Levering Should equity beta estimates be re-levered to the 60% gearing of the BEE? (DH: I thought they were) (GC: that is standard, however AER has elsewhere compared betas without undertaking this) Medium Overseas data What is the appropriate role for the evidence on equity of overseas energy network businesses? Medium Other Infrastructure data What is the appropriate role for the evidence from domestic infrastructure businesses? Medium Other approaches (Supposed) low Beta bias How should low-beta bias associated with the SL-CAPM, and evidence from the Black CAPM, be taken into account when implementing the foundation model approach? Assuming there is one High Time variation Does the equity beta move over time and if so over what period? Propose discuss at a joint Experts Session? MRP = Market Risk Premium Is there an inverse relationship between MRP and risk-free rate? (note: personal view that this is only being included because the AER needs to be able to respond to the proposition) Propose discuss at a joint Experts Session? Historic Excess returns What data should be considered? What role should the geometric mean of historical excess returns Medium
play in arriving at an estimate of the MRP? Dividend Growth Why is the DGM’s market risk premium higher than indicated from other evidence? What role should DGM estimates play in arriving at an estimate of the MRP? High Sharpe ratios Why are networks’ Sharpe ratios high? Propose discuss at a joint Experts Session? The Wright evidence How should the Wright evidence be used to inform the estimate of the MRP? How is this evidence used by regulators? High Independent Expert Evaluation Reports How should independent expert valuation reports be used to inform the estimate of the MRP? Medium Regulatory consistency What estimate of MRP is supported by recent decisions of other Australian regulators? Propose discuss at a joint Experts Session? Survey data In developing the MRP we use the ASX accumulation index as the prime source of data to develop the measure. This data reflects the operations of firms where assets are depreciated from actual cost and not indexed, where revaluations are taken to profit, firms are exposed to optimisation of assets, firms are subject to technological obsolescence, etc, whereas the firms we apply the outcomes of the data are not subject to any of these aspects, implying that the data is not necessarily sufficiently closely relevant. {Or does the equity Beta What estimate of MRP is supported by recent surveys? Propose discuss at a joint Experts Session?