The Australian Energy Regulator (AER) this week released the joint Eligible Experts’ Report for the 2026 Rate of Return Instrument (RORI) review.
The RORI specifies the method that the AER must use to set the allowed rate of return for the energy networks it regulates and the AER must seek concurrent expert opinions or evidence about the proposed RORI.
The allowed rate of return determines the incentives for regulated networks to invest efficiently to deliver services that would promote the long-term interest of consumers.
Frontier Economics' Director and Economist Dinesh Kumareswaran was appointed as one of the AER’s three independent Eligible Experts, alongside Professor David Johnstone and Associate Professor Graham Partington. The joint report sets out their views on three key issues that are the focus of the 2026 RORI review.
Dinesh’s views on the three core issues are the following:
- Equity beta — The AER should broaden the comparator sample used to estimate equity beta using both domestic and international comparators, given that the number of listed domestic comparators has now shrunk to just one firm. The AER should adopt a positive debt beta when de-levering and re-levering betas but should err toward the lower bound of debt beta estimates, because inadvertently overestimating the debt beta would downwardly bias the equity beta allowance, and therefore the overall rate of return.
- Weighted trailing average return on debt — The AER should adopt a weighted trailing average approach to set the return on debt allowance, as this would result in a closer match between networks’ allowed revenues and their efficient interest costs. This would better incentivise efficient investment. Dinesh recommended a simpler, more practical debt transition to the one proposed by the AER. He also advised that the return on debt allowance should be trued-up to reflect networks actual (rather than forecast) capital expenditure over a regulatory period to ensure a more accurate allowance.
- Third-party yield curve data — Dinesh agreed with the AER’s proposal to reinstate use of Reserve Bank of Australia data, alongside data from Bloomberg or Refinitiv, to strengthen the robustness and stability of corporate bond yield estimates.
Dinesh, Professor Johnstone and Associate Professor Partington's analysis provides valuable guidance on how the rate of return framework can continue to support efficient investment and deliver benefits to consumers over time.
