Posts filed under Reports

Airport market power ‘fact check’

September 2018

Today the ACCC submitted to the Productivity Commission’s inquiry into airport regulation that the current price monitoring regime is not effective in constraining airports’ market power, and that increased regulatory intervention is required (see here). But the ACCC’s evidence for the exercise of market power is thin: an assertion as to rising average revenues per passenger and quality of service metrics that remain ‘stable’. Substantial new investment in runway and terminal capacity has been overlooked, and the ACCC’s average revenue per passenger metric is heavily distorted by the changing mix of international and domestic passengers.

AAA.jpg

HoustonKemp analysis for the Australian Airports Association (see here) shows a very different picture. The long term profitability of aeronautical services provided at each of the four monitored airports show no signs of market power, with returns on investment over ten years all converging to within the range of weighted average cost of capital estimates previously adopted by the ACCC itself and New Zealand’s Commerce Commission.

We look forward to the Productivity Commission’s evidence-based analysis.

Posted on September 18, 2018 and filed under Reports.

Airport market power – taking off or pie in the sky?

August 2018

Greg, Luke, Sarah, Bronwyn and Nick recently advised Australia’s four major airports as part of the Productivity Commission’s inquiry into airport regulation. We analysed the extent to which the airports have market power in car parking and ground access, and whether they have used any such power.

Our analysis shows that, despite the ACCC’s repeated claims of “very high” profit margins (see here), the airports do not appear to be exercising market power in the provision of car parking or ground access services. Indeed, car parking prices appear to be explained to a significant extent by locational rents and convenience premiums, which are key elements of efficient pricing.

The airports are materially constrained in car parking by off-airport car parking operators and the availability of many other transport options with a diverse range of features and prices. The airports also have a strong incentive to maximise the number of visitors accessing the airport, since ground access revenues tend to represent only a small proportion of total airport revenue.

Our reports can be found here: Brisbane Airport, Melbourne Airport, Perth Airport and Sydney Airport.

Posted on September 11, 2018 and filed under Reports.

Queensland’s declaration triple-header takes shape

July 2018

The three, newly minted, economic criteria governing the ‘declaration’ of infrastructure services under Part IIIA of the Competition and Consumer Act 2010 (CCA) are being given a thorough work out in an unprecedented, triple-header declaration review being undertaken by Queensland’s Competition Authority (QCA).

In the 23 year history of the Competition and Consumer Act 2010 (CCA) framework for third party access, no infrastructure service in Queensland has been formally assessed against the declaration criteria. Side-stepping the national regime, the state of Queensland deemed three services to be declared and developed bespoke regimes for the economic regulation of their terms of access. Those declared services are:

  • below rail services provided by Aurizon’s central Queensland coal network;
  • coal handling services provided at Dalrymple Bay coal terminal (DBCT); and
  • below rail services provided by Queensland Rail’s network, comprising all Queensland’s rail lines other the coal network operated by Aurizon.

Following legislative change in 2010, the declared status of each these services is set to expire in September 2020, and the QCA is charged with undertaking a review and recommending whether each should continue to be declared. The Queensland Treasurer will be the ultimate decision-maker, upon recommendation from the QCA.

 Source: Shutterstock

Source: Shutterstock

The declaration criteria to be applied by the QCA are essentially the same as those under the national access regime set out in the CCA, but with two important procedural distinctions. First, the declaration review body (normally, the independent National Competition Council) is the same as that which regulates the services concerned. A QCA recommendation that any of the services should no longer be declared would see it voting to discontinue a substantial portion of its existing functions. Expect close scrutiny of the QCA’s reasoning for any hint of self-interest.

Second, there is no right for interested parties to seek merit-based review of the Treasurer’s decision. In contrast, most declaration decisions made under the national regime have been referred for merits review by the Competition Tribunal and, in several instances, judicial review by the Full Federal Court. On three occasions, critical elements of the declaration regime have been decided by the High Court. Expect close scrutiny of the QCA’s reasoning (or, if different, that of the Treasurer) for any hint of procedural or legal irregularity.

 Source: Dalrymple Bay Coal Terminal Pty Ltd

Source: Dalrymple Bay Coal Terminal Pty Ltd

The Queensland process presents complex issues, each to be assessed against new criteria. The service providers have all contended their particular service should no longer be declared, but each cites different combinations of criteria that are said not to be satisfied:

  • Aurizon contends that its continued declaration does not satisfy the criterion (d) net public interest test, citing evidence of ‘regulatory failure’ under the present regime;
  • DBCT Management maintains that its service does not satisfy the material promotion of competition test under criterion (a), the criterion (b) natural monopoly test, and that its continued declaration is not in the public interest, as required by criterion (d); and
  • Queensland Rail contends that its heavily subsided services do not satisfy declaration criteria (a) or (d), that competition from road may mean its rail lines do not satisfy the criterion (b) natural monopoly test, and that five of its eight rail systems do not meet the Queensland significance test under criterion (c).

All four criteria must be satisfied for a declaration recommendation to be made.

The various submissions from service providers and users are supported by legal opinions and expert economic reports, as well as a second round of further material submitted in response to the first. Come late July, the QCA will slip into ‘regulatory purdah’ to consider all the material, with its eagerly awaited, precedent-setting draft decision anticipated by December 2018.

HoustonKemp’s economic experts are advising DBCT Management and Queensland Rail throughout the declaration review, and have filed four expert reports for consideration by the QCA.

Competitive effects of office product suppliers merger

November 2017

Greg prepared two expert reports on behalf of Complete Office Supplies that, with the assistance of Luke and Tony, were submitted to the High Court of New Zealand. Complete Office Supplies’ brought injunction proceedings to prevent Platinum from acquiring rival office supplies firm OfficeMax. The Commerce Commission subsequently joined the proceedings. Later Platinum agreed to divest Winc to a purchaser approved by the Commission once it acquired OfficeMax.

Posted on November 29, 2017 and filed under Reports.

ElectraNet public forums in Port Lincoln

November 2017

20171119_181135_resized.jpg

HoustonKemp has been working with ElectraNet on a RIT-T assessment of options for electricity transmission upgrades on the Eyre Peninsula.  We have undertaken the wholesale market modelling for the RIT-T assessment and also applied real option valuation – the first time this has been done formally for a RIT-T.  Ann Whitfield, Tom Graham and Sam Forrest are presenting on this approach at the ElectraNet public forums in Port Lincoln (November 20) and Adelaide (November 27).  ElectraNet’s RIT-T assessment can be accessed here.

Posted on November 23, 2017 and filed under Reports.

Dispute over regulatory investment test outcome

May 2017

HoustonKemp provided an independent report in relation to the first formal dispute of a regulatory investment test outcome.  The review related to SA Power Network’s RIT-D assessment of the Kangaroo Island submarine cable.  We were asked by the AER to consider whether the RIT-D had been applied in accordance with the regulatory framework and, if not, whether this is likely to have materially affected the outcome.  Our report has been published by the AER is and available here.

Posted on May 22, 2017 and filed under Reports.

Powering Sydney's Future

May 2017

As part of its Powering Sydney’s Future (PSF) RIT-T assessment, TransGrid has published a report prepared by HoustonKemp on the issues to be considered in determining a commercial discount rate for a RIT-T application.  Our report also provides a “first-pass” indicative commercial discount rate that we consider appropriate to apply to the PSF RIT-T.  Our report can be accessed here.

 

Posted on May 9, 2017 and filed under Reports.

Retail margin methodology

May 2017

HoustonKemp has prepared a report for ActewAGL Retail, in relation to the ICRC’s draft decision to change the methodology for determining the retail margin component of regulated electricity standing offer prices. We considered the adequacy of the ICRC’s approach in light of the factors that may be expected to affect the costs recovered by the retail margin, the rationale provided by the ICRC and the approach adopted by other regulators. Our conclusion is that the ICRC’s central assumption that retail margin costs move in line with changes to CPI is not supported by any evidence, and our own assessment indicates that there are other drivers of these costs.  Our report is available here.

Posted on May 4, 2017 and filed under Reports.

Expert report on proposed merger

May 2017

Greg Houston prepared an expert report for Minter Ellison in relation to the application before the Australian Competition Tribunal by Tabcorp for authorisation to acquire Tatts. The report examines the effect of the proposed merger on competition, and the public benefits that are likely to arise. Greg was assisted by a number of our team including Luke Wainscoat, Sarah Turner, Daniel Young, Sam Forrest, Stuart Morrison and Sarah Nelson. The report is available here.

VCR estimates and transmission reliability

November 2016

We were engaged by TransGrid to determine Value of Customer Reliability (VCR) estimates suitable for customers experiencing low probability but high impact supply outages in the Sydney CBD and Inner Suburbs regions.  We were asked to determine these VCR estimates by drawing on existing, publicly available VCR studies.  The values we derived were $90/kWh for Inner Suburbs customers and $150-$192/kWh for customers in the Sydney CBD. 

IPART has subsequently adopted our $90/kWh estimate in recommending reliability standards to apply to the Inner Sydney transmission network from 1 July 2018, available here.

Posted on November 2, 2016 and filed under Reports.

Reforming remote and regional road funding

October 2016

Adrian Kemp and Martin Chow led a team of HoustonKemp economists that examined potential road funding reform options and the implications of these reforms for remote and regional roads for Austroads. The report also provided a snapshot of current and past road related revenue, expenditure and funding to inform the debate. A copy of report can be found here.

Posted on October 27, 2016 and filed under Reports.

Review of maximum fees and site occupation charges for cruise ships in Sydney Harbour

September 2016

Adrian Kemp and Daniel Young led a team of HoustonKemp economists assisting the Port Authority of New South Wales to engage with the Independent Regulatory and Pricing Tribunal’s (IPART) review of maximum fees and site occupation charges for cruise ships in Sydney Harbour. We helped the Port Authority prepare its responses to IPART’s issues paper and draft decisions, and to understand the implications of IPART’s emerging views on its business. Adrian and Daniel attended IPART’s public hearing on this topic on 23 August 2016. A transcript from the hearing is available here.

Posted on October 6, 2016 and filed under Reports.

New Zealand Commerce Commission’s review of Input Methodologies

August & September 2015

Greg Houston and Carol Osborne assisted New Zealand electricity lines and gas pipelines business, Powerco, in relation to the Commerce Commission’s review of its ‘input methodologies’ for setting price and revenue caps. In a report on the methodology for determining the regulatory WACC, we identified elements with the potential to improve the incentives on businesses for prudent and efficient decision-making. In a second, supplementary report, we responded to submissions by the Major Energy Users Group and Sustainable Electricity Association New Zealand. These reports can be found here and here.

Posted on September 16, 2015 and filed under Reports.

Commerce Commission’s Proposed Framework for Chorus

May 2015

HoustonKemp was engaged by Chorus, the New Zealand telecommunication network owner, to provide advice in relation to the Commerce Commission’s framework for assessing whether an uplift should be applied to the WACC and/or price for Chorus’ unbundled cooper local loop services. We concluded that the Commission’s proposed framework did not give sufficient attention to the implications of its decision on investment incentives. Our report can be found here.

Posted on May 18, 2015 and filed under Reports.

Implications for Jemena Gas Networks (NSW) of Increasing Competition in the Consumer Energy Market

April 2015

Adrian Kemp, Luke Wainscoat and Richard Grice prepared a report for Jemena Gas Networks (JGN) that examined the extent to which there is an increased opportunity for substitution from gas to electricity, and the implications for the incentives that JGN faces in operating its natural gas network in NSW. Our report can be found here, starting at page 14.

Posted on May 5, 2015 and filed under Reports.

AER Determination for ActewAGL Distribution

13 February 2015

Greg Houston prepared an expert report for ActewAGL Distribution, evaluating the Australian Energy Regulator’s  draft distribution determination for the 2015–19 regulatory control period. Greg’s report, prepared with the assistance of Ann Whitfield and Dale Yeats, provides an opinion on whether the AER’s determination is likely to contribute to the achievement of the National Electricity Objective (NEO) and to represent a materially preferable NEO decision.  Our report can be found here.

Posted on March 8, 2015 and filed under Reports.

Efficiency Benefit Sharing Schemes

11 February 2015

Ann Whitfield, Brendan Quach and Ehson Shirazi prepared a report for ActewAGL Distribution illustrating Efficiency Benefit Sharing Schemes that could be applied where the network business’ operating expenditure allowance in the following regulatory period is set on the basis of either the network’s revealed opex costs or by reference to comparative efficiency.  Our report is here.

Posted on March 2, 2015 and filed under Reports.