In its pricing determination, IPART uses a real rate of return to determine the cost of capital allowance of its building blocks model. This cost of capital allowance, of which the cost of debt is a major component, forms a substantial part of the annual revenue requirement of utilities. The cost of debt is calculated by adding a debt margin to the nominal risk free rate. IPART has become concerned about the reliability of its traditional methodology to estimating the debt margin. This discussion paper investigates alternative approaches to the determination of the cost of equity.

In its pricing determination, IPART uses a real rate of return to determine the cost of capital allowance of its building blocks model. This cost of capital allowance, of which the cost of debt is a major component, forms a substantial part of the annual revenue requirement of utilities. The cost of debt is calculated by adding a debt margin to the nominal risk free rate. IPART has become concerned about the reliability of its traditional methodology to estimating the debt margin. This discussion paper investigates alternative averaging periods and indexing of the market dependent WACC parameters.

The paper describes and compares the key components of the Australian Energy Regulator's (AER) and IPART's building block calculation models. The comparison was undertaken to enable IPART to better understand how the AER calculates regulated entities' revenue requirements and to identify any differences between the AER's and IPART's financial models and the reasons for those differences.

In its pricing determination, IPART uses a real rate of return to determine the cost of capital allowance of its building blocks model. This cost of capital allowance, of which the cost of debt is a major component, forms a substantial part of the annual revenue requirement of utilities. The cost of debt is calculated by adding a debt margin to the nominal risk free rate. IPART has become concerned about the reliability of its traditional methodology to estimating the debt margin. This discussion paper investigates IPART's WACC in light of the AER's WACC review and the global financial crisis.

IPART engaged Cambridge Economic Policy Associates (CEPA) to review Australian and international practice of incentive-based regulation (i.e. CPI-X regulation). The purpose was to enhance our understanding of issues and developments in practical approaches to incentive regulation and to identify approaches from which IPART might learn. The CEPA report concludes, overall, that IPART’s current approach to regulating entities appears appropriate to the types of entities it regulates, but highlights interesting examples of regulatory practice elsewhere that IPART could monitor or further examine in future. These will be taken into account in IPART’s ongoing work. CEPA’s report draws on a range of case studies of regulatory practice and regimes in Australia and overseas. It is a useful resource for regulators and other interested persons on current approaches to incentive-based regulation and the ‘state of play’ on key regulatory issues.

IPART plans to conduct a household survey in the Sydney Water Corporation area of operation in 2010. The aim of the project is to provide IPART with a better understanding of the impact of its pricing decisions on residential households in these areas. Interviews will be conducted to collect information on household characteristics, for example household size, income, appliance ownership and awareness of energy retail competition. Households will be asked to sign a consent form allowing their water and energy utilities to release their consumption data. The two sets of data will be matched by the consultant appointed by IPART to conduct the survey, and all personal information will then be permanently deleted. IPART will produce a report that will be released toward the end of 2010.

IPART intends to change the method used to measure general price inflation in industry price determinations. With the change, an annual inflation factor will be calculated by comparing the CPI for the latest quarter with the CPI for the corresponding quarter of the previous year. In the past, an ‘annual average’ percentage change was used. The change is to apply to all future industry price determinations apart from taxis, private ferries and rural and regional buses for which industry-specific cost indexes are used.

In its pricing determination, IPART uses a real rate of return to determine the cost of capital allowance of its building blocks model. This cost of capital allowance, of which the cost of debt is a major component, forms a substantial part of the annual revenue requirement of utilities. The cost of debt is calculated by adding a debt margin to the nominal risk free rate. IPART has become concerned about the reliability of its traditional methodology to estimating the debt margin. This discussion paper investigates alternative methodologies that could be used to estimate a debt margin for regulated utilities.