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New Study Slams Commerce Commission's Analysis

New Study Slams Commerce Commission's Economic Analysis

"A new study published by Victoria University's Institute for the Study of Competition and Regulation (ISCR) makes serious implicit criticisms of the Commerce Commission's approach to network industry regulation", Roger Kerr, executive director of the New Zealand Business Roundtable, said today.

He was drawing attention to the paper Estimating the WACC[1] in a Regulatory Setting by Glenn Boyle, Lewis Evans and Graeme Guthrie released on 20 March. It is a critique of academic analysis and advice that has clearly influenced Commission decisions.

The ISCR study identifies many errors in recommended procedures for estimating the cost of capital and it criticises the simplistic application of models derived from finance theory to regulatory decisions.

The study suggests that some cost of capital estimates used by the Commission have been far too low, with negative effects on investment incentives. This could put at risk the supply of badly needed infrastructure.

Mr Kerr said that these criticisms mirrored concerns that the Business Roundtable and others had conveyed to the Commission.

"In the context of telecommunications regulation we have argued that many elements of the Commission's work were highly subjective and fundamentally arbitrary, thereby posing risks to New Zealand's investment climate and reputation. The margins for error in its approach were far higher than it has been prepared to acknowledge."

In the same context, the NZX had submitted that the low cost of capital that the Commission was postulating "fails, to put it bluntly, the sanity test of business."

"The fact is that investment decisions are a matter of entrepreneurial judgment", Mr Kerr said. "There is no reliable, non-market way of determining what return investors actually require on investments subject to such regulatory and market risks.

"The Commerce Commission should heed these warnings and the ISCR report should be required reading for Commissioners and staff", Mr Kerr concluded.


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