CORRECTION: Auckland Airport development stymied   3 Aug 2012

CORRECTION: Auckland Airport development stymied by Commerce Commission rules

By Pattrick Smellie

(corrects last paragraph reference to value of domestic terminal upgrade)

Aug. 3 (BusinessDesk) - The Commerce Commission's straitjacket approach to regulating returns on Auckland International Airport's assets is strangling the country's main gateway airport from necessary expansion.

In mandatory filings lodged today, AIA said it was basically ignoring the commission's acceptable weighted average cost of capital (WACC) requirements where it believes they can't be reasonably supplied.

At the same time, the airport released its new charges for airlines and passengers using both the international and domestic terminals over the next five years, as it is required to do every three years as part of its obligations to the commission, which regulates returns on monopoly assets.

Other industries monitored by the commission include electricity, gas and telecommunications networks, ports and airports. Many in these sectors are also challenging the commission's input methodologies for determining acceptable rates of return on capital. Ministers and the Ministry of Business, Information and Employment have been lobbied on widely perceived shortcomings in the way the commission is implementing its role.

The airport's main argument is that the commission's adherence to an inflexible WACC calculation is wrong because "a precise return cannot be calculated and … the WACC must be considered within a range."

The airport's biggest beef is the commission's decision not to include undeveloped airport land when it considers WACC calculations, leading to a perverse discouragement to develop the airport's delayed Northern Runway project.

"Auckland Airport is concerned that the commission's methodology may not deliver commercially acceptable outcomes for the airlines in the future due to the step change in pricing implied by it," AIA's acting chief executive Simon Robertson says in the introduction to its filings. The airport is anxious not to "constrain the country's economic growth agenda."

The airport says its proposed tariff increases over the next five years are "flat in real terms", and in "the middle of the pack" at just under $30 in total costs per customer, and equate to an 8.475 percent WACC, compared to the commission's requirement for 8.04 percent expectation.

It was "problematic" to measure appropriate WACC returns, when "risk-free rates are at unprecedented low levels in some countries", without reference to Auckland airport's cost of funding.

However, additional costs are weighted towards domestic customers because benchmarking studies showed "consumers consider the quality of the international experience at Auckland Airport to be well above average."

However, Australasian comparisons showed domestic charges were at the bottom of the range, and the domestic terminal requires an urgent upgrade worth up to $30 million, ahead of a new domestic terminal development, expected to cost $245 million over several years.

(BusinessDesk)

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