ComCom Input Methodologies decision
TDB provided expert support to the Board of Airline Representatives of New Zealand (BARNZ) during the 2023 Commerce Commission review of Input Methodologies (IMs) for regulated services. Our focus was on the cost of capital methodologies for airports, especially the asset beta used in the cost of capital estimate alongside the set of comparator airports around the globe that would provide reasonable benchmarks for regulated airports in New Zealand.
In the previous two IM determinations, the Commerce Commission had estimated the asset beta for the forthcoming regulatory period from an average of the betas over the two preceding 5-year periods. TDB and others argued that this approach would not be suitable for the 2023 review in view of the spike upwards observed in airport betas during the Covid-19 pandemic. We suggested that while the prospect of future pandemic-like events certainly shouldn’t be disregarded, including the full impact of Covid-19 in the rolling 5-year average would likely lead to an asset beta estimate that was inappropriately high for the coming period. Such an approach would probably overstate the prospective frequency with which Covid-like events could recur. In other words, on this occasion the immediate past would not be the best guide to the future.
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Instead, TDB presented asset beta estimates that replicated a methodology that the Flint Group proposed to the U.K. Civil Aviation Authority (CAA) for addressing the same Covid-related issues (an approach that was subsequently adopted by the CAA.) Under this methodology, data from recent Covid-affected and non-Covid affected periods are used in weighted least-squares regressions to simulate the effects of Covid-like events at different frequencies – e.g., from once every 20 years to once every 50 years. These estimates lead to a suggested uplift in the non-Covid affected asset betas to take into account the enduring impact of Covid-like events occurring at a plausible frequency.
In its final IM decisions issued in December 2023, the Commission largely agreed with TDB’s reasoning. It moved away from the 5-year rolling average methodology, using instead the Flint-type approach for estimating the systematic impact of Covid if such events occurred at a 20 to 50 year frequency, and then adding this to asset beta estimates from recent non-Covid affected periods.
Asset beta estimates are derived from a global sample of “comparable” airports. In the 2016 IM review, the Commission used 26 comparators, covering a wide range of economic, financial, and operating characteristics. TDB and others argued that, while a large sample could help smooth results in some circumstances, these benefits fade if there is a disproportionate number of less comparable airports. TDB suggested that, on balance, a smaller sample of more comparable airports should be used.
In its final decisions, the Commission followed much the same line of reasoning as TDB, noting too that a group of more comparable airports would provide a better basis for assessing the systematic impact of Covid under the methodology discussed above. The Commission ended up with a sample of 9 comparators, drawing these mainly from the advanced economies and eliminating from its previous sample airports that appeared to have relatively high degrees of financial variability and/or risk.
