Nexa Advisory welcomes the opportunity to respond to the Australian Energy Regulator’s draft 2026 Rate of Return Instrument (RORI).
Nexa has focused on a limited number of issues that warrant further consideration before the AER makes its final decision.
The NEO requires an unbiased estimate of the required rate of return. The allowance must be sufficient to support efficient investment, but no higher. There is no evidence that the 2022 RORI has materially under-compensated investors or deterred investment in regulated networks. The more immediate risk is that consumers continue to pay a return above the efficient cost of capital.
An upwardly biased allowance would not only increase bills. It may encourage inefficiently low network utilisation, inefficient bypass or disconnection, and distort choices between network and non-network solutions.
Nexa therefore recommends that the AER:
- provide a stronger demonstration that the final RORI is no higher than necessary to deliver required investment, while giving appropriate weight to the risks of setting the allowance above the efficient cost of capital;
- avoid allowing regulatory stability to privilege the incumbent methodology;
- reconsider aligning the benchmark term of the risk-free rate (for calculating return on equity) with the regulatory period; and
- broaden the scope of the review to examine on-the-day and hybrid return-on-debt approaches to better align the regulatory allowance with the opportunity cost of capital.
Read our full submission here: Nexa Advisory submission – AER Draft RORI