Risk-free rate and the market risk premium
On 27 November 2012, the QCA released the discussion paper, The Risk-free Rate and the Market Risk Premium, for public comment.
The paper addressed issues relating to estimating both the risk-free rate and the market risk premium in the context of applying the CAPM to determine the cost of equity for regulated firms.
It also summarised current Australian regulatory practice in these areas, including the QCA's approaches to estimation.
The QCA received 21 submissions from interested parties.
The QCA engaged Dr Martin Lally to:
- respond to the stakeholder submissions
- comment on related material in Aurizon Network’s 2013 Draft Access Undertaking submission on the cost of capital with respect to the risk-free rate, market risk premium and the implied cost of equity
- review related submissions on the Price Monitoring of SEQ Water and Wastewater Distribution and Retail Activities 2013–15.
The QCA received 4 submissions in response to Dr Lally's paper.
In October 2010, the Australian Competition Tribunal determined that the Australian Energy Regulator (AER) had erred in estimating the utilisation rate for imputation credits in its May 2010 final decisions on electricity distribution for 2010-2015 for Queensland (Energex and Ergon Energy) and South Australia (ETSA Utilities).
The Tribunal instructed the AER to engage SFG Consulting to undertake a dividend drop-off analysis to estimate that parameter. The outcome of this was a report from SFG Consulting (2011). The Tribunal has invited comment and further work on gamma.
Given the importance of gamma to the cost of capital of firms regulated by the QCA, Dr Martin Lally was engaged to review the report by SFG Consulting. This report was published in October 2013.
Subsequently, in November 2013, we released a second paper on gamma by Dr Martin Lally that addressed a number of further issues relevant to estimating gamma.
The QCA received two submissions in response to Dr Lally’s papers.