Media Releases

Commission to begin further work on WACC input methodologies

31 March 2014

Following recent stakeholder consultation, the Commerce Commission has decided to issue a notice of intention to do further work on the input methodologies relating to the 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 its recent merits review judgment, the High Court suggested that using the 75th percentile may be at odds with the Part 4 objective to limit the ability of regulated suppliers to earn excessive profits. In light of the High Court’s comments, and subsequent requests from consumers, the Commission sought submissions on whether it should consider reviewing or amending the input methodologies for the cost of capital at this time.

“Having considered submitters’ views, we have decided to begin further work on whether using the 75th percentile is appropriate,” said Commerce Commission Deputy Chair Sue Begg. “We believe that this process is necessary to address the return on investment uncertainty that will exist until this issue is resolved. Our aim is to complete this work prior to November 2014, when electricity lines prices will be set for the next five years,” said Ms Begg.

“The Commission has an open mind about the outcome of this work and we are keen to hear from interested parties with further evidence or expert reports. We are not pre-judging the direction of any potential change or whether any change is even necessary,” Ms Begg said.

“While we aim to complete the work by November, in the event that all the issues involved cannot be satisfactorily resolved before then, we will consider bringing forward the overall review of the WACC input methodologies,” said Ms Begg.

The process update paper can be viewed on the Further work on WACC page.

The Commission welcomes further submissions until 5pm on 1 May 2014, these should be emailed to regulation.branch@comcom.govt.nz

Background

Part 4 Industries

Industries regulated under Part 4 that have price-quality paths include electricity lines services and gas pipeline services. Industries that are subject to information disclosure under Part 4 include those above as well as specified airport services.

Input methodologies

Input methodologies involve setting upfront regulatory rules, processes and requirements that apply to the regulatory instruments under Part 4 of the Commerce Act. They were determined in December 2010 for specified airport services, electricity distribution and transmission, and gas pipelines. The Commission must review each input methodology no later than seven years after its date of publication and, after that, at intervals of no more than seven years.