Application by Jemena Gas Networks (NSW) Ltd (No 5)

The matter before the Australian Competition Tribunal (the Tribunal) is an application by Jemena Gas Networks (NSW) Ltd (the Applicant) for a review of the decision of the Australian Energy Regulator (the AER) to determine the Applicant’s cost of debt for the purposes of determining its weighted average cost of capital (WACC). The Applicant argues that the AER erred in the calculation of the debt risk premium (DRP) used in determining the WACC. The DRP is the margin above the risk-free rate that investors in an efficient service provider business are likely to require to provide funding to that business. The Applicant argues that the AER should have used the yield on a single bond (the 3.875% 2016 bond issued by the Applicant) as the DRP, rather than the average observed yields of the five bonds selected by the AER.

The legal issues before the Tribunal are whether the AER correctly identified the benchmark bonds to use in calculating the DRP, whether the AER correctly excluded the Babcock & Brown Infrastructure bond from its sample, and whether the AER correctly determined the best fit fair value curve. The Tribunal found that the AER correctly identified the benchmark bonds to use in calculating the DRP, as the bonds selected by the AER reflected as closely as possible the characteristics of the bonds that would be issued by the benchmark service provider. The Tribunal also found that the AER correctly excluded the Babcock & Brown Infrastructure bond from its sample, as the observed yield for that bond was not representative of its credit rating due to market developments in late 2008 and early 2009. Finally, the Tribunal found that the AER correctly determined the best fit fair value curve, as the CBASpectrum curve most closely aligned with the observed yields of the selected bonds.

The Tribunal dismissed the Applicant’s application for review. The Tribunal found that the AER correctly calculated the DRP using the average observed yields of the five bonds selected by the AER, and that the Applicant’s argument that the yield on a single bond should have been used as the DRP was not supported by the evidence. The Tribunal also found that the AER’s methodology for calculating the DRP was reasonable and consistent with industry practice. The Tribunal noted that the Applicant’s proposed methodology would have resulted in a significantly higher DRP, which would have had a substantial impact on the Applicant’s WACC and its regulated revenue. The Tribunal concluded that the AER’s decision to use the average observed yields of the five bonds selected by the AER was reasonable and should be upheld.

The Tribunal made no orders.