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Commission releases expert reports about the WACC percentile

Commission releases expert reports about the WACC percentile


Issued 23 June 2014

Release No. 118

The Commerce Commission has released a number of expert reports as part of its ongoing review of the appropriate percentile estimate of the weighted average cost of capital (WACC). The WACC is used in the price-quality path and information disclosure regimes that apply to businesses regulated under Part 4 of the Commerce Act 1986.

In a judgment at the end of last year, the High Court questioned the Commission’s use of the 75th percentile estimate of the WACC to set price-quality paths. The Court considered the 75th percentile was insufficiently supported by evidence, and might be at odds with the Part 4 objective to limit the ability of regulated suppliers to earn excessive profits.

Following consultation with stakeholders about the implications of the judgment, the Commission sought further evidence to inform its decision whether the appropriate level is above, below, or at the 75th percentile.

“The reports released today add to the analytical and empirical evidence already provided in submissions from interested parties about the appropriate WACC percentile,” said Commerce Commission Deputy Chair Sue Begg. “Most of the quantitative analysis undertaken focuses on the electricity sector, because we are resetting prices for electricity lines services for the next five years in November.”

“Despite that focus, the evidence is relevant to all the sectors regulated under Part 4, including airports and gas pipeline businesses. We are releasing these reports in advance of our draft decision so that all interested parties have more time to engage their own experts to comment on that evidence.”

The reports were prepared by a number of expert advisers and firms engaged by the Commission: Professor Ingo Vogelsang of Boston University, Professor Julian Franks of the London Business School, Associate Professor Martin Lally of Victoria University of Wellington, European economic consulting firm Oxera, and the Australian consultancy Economic Insights.

The Commission also released a working paper about regulatory incentives and the cost of capital, and plans to release a peer review of Oxera’s report by Professor Vogelsang when it is available.

Submitters will be able to provide their views on these reports as part of their submissions on the Commission’s draft decision. A process update paper accompanying the reports sets out the intended timing and scope of the draft decision.

“At this stage, the main change to our process is to delay our draft decision on the appropriate WACC percentile for airports, given the combination of its different industry characteristics and its regulatory regime” said Ms Begg. “We will advise the revised timeline for our airports draft decision at a later date.”

You can find the expert reports on the Commission’s website: Further work on WACC.


ends

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