New Zealand Commerce Commission
What was the client issue?
Following an appeal by the Major Electricity Users Group (MEUG), the High Court in New Zealand rejected the Commission’s approach to determining the assumed return for electricity distribution and transmission businesses on investments in their networks. The Court did not impose the alternative proposed by the MEUG, but did require the Commission to demonstrate evidence if it wanted to maintain its existing approach; namely, to include a margin within the assumed profit for the energy network businesses (i.e. the cost of capital) to offset the risk of underinvestment.
How did we help the client solve it?
We provided a new and innovative approach to balancing the evidence in support of different choices for the cost of capital assumption—especially in relation to the risks identified by the Commission in respect of underinvestment. In particular, we recognised the potential to apply evidence alongside the continuing need for judgement by the regulator. Our analysis indicated a range below that previously applied by the Commission, but above that proposed by the MEUG, and we identified the various forms of judgement that would support different approaches.
Why was the outcome compelling for the client?
Within its consultation on its response to the High Court challenge, the Commission applied our evidence in coming to a lower margin to offset the risk of underinvestment than previously applied, within the range proposed by Oxera. Following review by Oxera and the Commission of consultation responses, the Commission confirmed in its decision that it would apply the methodology proposed by Oxera.