Good and bad news in ComCom decisions

Media release
Good and bad news in ComCom decisions

Wednesday 29th December 2010

“The Commerce Commission decisions for monopoly electricity, gas and airfield services are a mixed bag for consumers” said Ralph Matthes, Executive Director of MEUG. He was commenting on the decision on 23rd December by the Commerce Commission on Input Methodologies covering asset valuation, cost of capital, allocation of costs, treatment of tax etc1.

“For asset valuations the decision is good news, as summarised in the foreword to the decision:
“In the case of asset valuation, all regulated suppliers have strongly argued for asset valuations at the start of the Part 4 regime that are likely to be significantly higher than the regulatory valuations already in place. In the case of electricity distribution businesses, adopting this approach could legitimise price increases that would, based on what we believe to be a very conservative assessment, result in transfers from consumers to suppliers of almost $2 billion for no corresponding benefit. The Commission was not convinced by this proposition.”

“It is the cost of capital decision that there is good and bad news. The good news is the Commission has been unconvinced by the inflated claims by the 28 distribution companies, Transpower and their advisors for various up lifts in how cost of capital is determined.

“The bad news is the Commission has affirmed its draft decision to use a model that the Commission itself acknowledges is flawed2. In addition the final decision exacerbates the flaw to the disadvantage of consumers. The reasoning for continuing with the flawed model is not convincing. Consumers will pay3an extra $117 million per annum for monopoly electricity, gas and airfield services because the Commission has persisted with the flawed model.

“The Commission’s use of the acknowledged flawed model is in contrast to The New Zealand Treasury “Estimation of Crown’s Opportunity Cost of Capital” 4. The Commission decision doesn’t mention The Treasury guidelines even though we noted the disparity in our submissions. We think The Treasury, responsible for managing $161 billion of assets5(not counting financial assets) has got the cost of capital model right and the Commission regulating approximately $16 billion of monopoly businesses has got it wrong. Both can’t be correct.

1 Commerce Commission, Input Methodologies (Electricity Distribution and Gas Pipeline Services) Reasons Paper, 23rd December 2010, refer http://www.comcom.govt.nz/assets/Pan-Industry/Input-Methodologies/Final-Reasons-Papers/EDB-GPB-Input-Methodologies-Reasons-Paper-Dec-2010.pdf

2 A detailed explanation of this flaw is set out in the expert opinion of Garth Ireland, Ireland, Wallace & Associates, Input Methodologies (Electricity Distribution Services) Draft Reasons Paper, June 2010, Submission on Cost of Capital, 13th August 2010, refer http://www.comcom.govt.nz/assets/Pan-Industry/Input-Methodologies/Draft-Reasons-Papers/Draft-Reasons-EDBs/Costcapital-Sub/MEUG-Attachment-Submission-on-EDB-Input-Methodologies-Draft-Determination-and-Reasons-Paper-IWA-Paper-13-August-2010.pdf.

Commerce Commission acknowledgement of the model flaw is set out in, Input Methodologies (Electricity Distribution Services) Draft Reasons Paper, June 2010, paragraphs 6.3.42 to 6.3.44, refer http://www.comcom.govt.nz/assets/Pan-Industry/Input-Methodologies/Draft-Determinations-CC-Papers/Input-Methodologies-Electricity-Distribution-Services-Draft-Reasons-Paper-June-2010.pdf.

3 The $117m estimate is set out in MEUG to Commerce Commission, Submission on Pan Industry Input Methodologies for cost of capital, 13th August 2010, paragraph 6, refer http://www.comcom.govt.nz/assets/Pan-Industry/Input-Methodologies/Draft-Reasons-Papers/Draft-Reasons-EDBs/Costcapital-Sub/MEUG-Submission-on-EDB-Input-Methodologies-Draft-Determination-and-Reasons-Paper-13-August-2010.pdf.

The Commerce Commission decision paper of 23rd December 2010 changed leverage from 40% to 44%. This increase in leverage will increase charges payable by consumers, ie greater than prior estimate of $117m per annum.

4 The Treasury, Estimation of Crown’s Opportunity Cost of Capital, July 2008, refer http://www.treasury.govt.nz/publications/guidance/planning/costbenefitanalysis/discountrates/02.htm The web page referencing this Treasury report was updated in October 2010 and retains the cost of capital model proposed by MEUG and not the flawed model in the Commerce Commission final Determination.

5 Refer COMU media presentation 7th December 2010. Total Crown balance sheet is $220 billion. Less financial assets of $59 billion equal $161 billion.

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