The Commerce Commission has today released its revised draft guidelines on its approach to estimating the cost of capital.

Estimating the cost of capital is an important part of the Commission's work under Part 4 of the Commerce Act 1986, the Dairy Industry Restructuring Act 2001 and the Telecommunications Act 2001. It is a key component in assessing whether a regulated firm is able to earn a reasonable rate of return.

These revised draft guidelines provide the framework that the Commission proposes to employ in estimating the cost of capital. This framework will aid consistency and predictability in the Commission's approach to estimating the cost of capital in performing its regulatory functions.

The way that the guidelines are applied will vary depending on industry circumstances. For example, the guidelines will provide the framework for the Commission's determination of sector specific input methodologies on the cost of capital that are required to be made under Part 4 of the Commerce Act.

As the cost of capital guidelines provide the framework for the input methodologies associated with the cost of capital, these revised draft guidelines are being released at the same time as the input methodologies discussion paper.

The Commission looks forward to receiving feedback on the draft guidelines. This consultation will occur in parallel with the consultation on input methodologies for services regulated under Part 4 of the Commerce Act. This will ensure that the cost of capital guidelines can be effectively and appropriately applied in the development of sector specific determinations.

The Commission intends to increase its sector engagement by holding a workshop on the cost of capital with technical experts from the relevant sectors.

The revised draft guidelines on the cost of capital and the input methodologies discussion paper can be downloaded from the Commerce Commission's website at www.comcom.govt.nz under Industry Regulation/Cost of Capital.

Feedback on the guidelines should be sent to npb@comcom.govt.nz by 31 July 2009.

Background

The cost of capital is the expected rate of return that businesses require on their investments in order to compensate them for the risks that they bear.

The Commerce Commission first released its draft guidelines on the Commission's approach to estimating the cost of capital in October 2005. Submissions on the draft guidelines were received in January 2006.

The Commission appointed a panel of experts to evaluate the draft guidelines, consider issues raised in the submissions, and provide a report on the appropriate theory and application of cost of capital for regulatory purposes.

The panel comprised Professor Julian Franks (LondonBusinessSchool), Dr Martin Lally (Victoria University of Wellington) and Professor Stewart Myers (Sloan School of Management MIT).

The panel's final report is also being released alongside the revised draft guidelines. The panel's report can be downloaded from the Commerce Commission's website at www.comcom.govt.nz under Publications/Guidelines

The cost of capital guidelines will be finalised in the first quarter of 2010.