Auckland Airport development stymied by Commerce Commission rules
By Pattrick Smellie
Aug. 2 (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."
Australasian comparisons showed domestic charges were at the bottom of the range, and the domestic terminal requires an
urgent $245 million upgrade to accommodate larger aircraft now in common use.
(BusinessDesk)