Review of the beta and gearing for UCLL and UBA services
In New Zealand, under the regulatory framework for Chorus’ access services, stakeholders can request a determination under the ‘Final Pricing Principle’. This requires the Commerce Commission (the Commission) to determine the relevant costs for the access services, using a total-service long-run incremental cost (TSLRIC) approach. This is not based on Chorus’ actual services, but on those of a hypothetically efficient operator. The analysis has not previously been required, but is now being undertaken for the first time, following requests from stakeholders.
As part of this analysis, the Commission must determine what return on investment such an operator would require. To do this, the cost of capital for the relevant investments will need to be assessed. This may not be the same as Chorus’ cost of capital, but does need to be consistent with the risks associated with investment in services similar to those offered by Chorus.
The Commission asked Oxera to review the evidence around the company-specific elements of the cost of capital, assuming the use of the CAPM, and specifically the Brennan–Lally CAPM applied in other Commission decisions. In particular, Oxera has reviewed:
- the asset beta for a fixed access telecommunications operator. This was the primary area of analysis undertaken by Oxera, as it has the greatest impact on the assumed return for UCLL (unbundled copper local loop) and UBA (unbundled bitstream access) investments, and therefore the greatest impact on charges;
- the gearing and long-term credit rating for a fixed access telecommunications operator;
- the debt beta and equity beta that would be assumed for the hypothetical operator;
- whether the UCLL and UBA services should have a different beta to the hypothetical operator as a whole.
The Commerce Commission has released further draft decisions for consultation, setting proposed prices for use of local copper lines and broadband services over the next five years. Find more information here.