13 June 2003
Mr Alan Hamilton
Commerce Commission
PO Box 2351
WELLINGTON
Email: alan.hamilton@comcom.govt.nz
Dear Alan
Commerce Commission TSO Weighted Average Cost of Capital (WACC)
Federated Farmers of New Zealand (Inc) welcomes the opportunity to comment on
the Commerce Commission TSO discussion paper on the Weighted Average Cost of
Capital (WACC). As the Commission will be aware, the Federation submitted on the
Commission’s earlier TSO Model Documentation (Submitted 7 May 2003).
Federated Farmers is a primary sector organisation that represents approximately
18,000 farmers and various other rural businesses. Federated Farmers has a long
history of representing the needs and interests of New Zealand’s farming
communities, primary producers and agricultural exporters.
The Federation aims to add value to its members’ farming businesses. Our key
strategic outcomes include the need for New Zealand to provide an economic and
social environment within which:
•
Our members may operate their business in a fair and flexible commercial
environment;
•
Our member’s families and their staff have access to services essential to the
needs of the rural community; and
•
Our members adopt responsible management and environmental practices.
The Federation’s previous submission to the Commerce Commission (7 May 2003)
outlined the crucial importance of efficient and reliable telecommunications services
to the rural community.
2
While the Federation is supportive of the principle that any net losses associated with
the Telecommunications Service Obligations (TSO) Deed 2001 are independently
costed, failure to adequately compensate Telecom for services provided under the
TSO agreement will impact adversely on Telecom’s decision to invest further in
upgrading the rural network.
The Commerce Commission discussion paper proposes that the Weighted Average
Cost of Capital (WACC) be 6.0% for the purposes of estimating the net cost of the
TSO in its draft determination. While the Federation accepts that the TSO is not as
risky as many other investments, using a WACC of 6.0% is just over 1 percentage
point above the risk free rate of return on capital, and much lower than the WACC
proposed by the Commission for many other utility services such as airports and
electricity lines businesses.
The Federation considers that Telecom’s rate of return should at least be in line with
other regulated industries such as the 8.4% the Commission used as an appropriate
return on assets for Auckland International Airport, and the 6-8% for Electricity Lines
Businesses.
In saying this, the Commission would seem to have placed some considerable weight
on likening Telecom’s TSO business to an electricity lines business. This would
appear to be a dangerous simplification and one that flies in the face of technology
and policy changes happening in the telecommunications sector.
No serious alternative to transporting electricity other than the current technology
exists today. Compare this with telecommunications where wireless, satellite and
cellular technologies are increasingly viable technology alternatives. Not only are
such networks being built, the Government is actively subsidising through Project
PROBE such technologies.
In order to meet its TSO obligations, Telecom has to invest in long term assets –
measured in decades. The probability of technology change making these assets either
redundant or less than fully utilised in the next 5 years or so would seem to be very
high. The Federation would therefore recommend that the Commission treat with
caution any comparisons between the electricity and telecommunications industry.
The Federation strongly agrees with the Commission discussion paper (p.4) where it
states that the appropriate cost of capital is the opportunity cost of the funds in the
market. “If the Commission sets a cost of capital below this return, then investors
will prefer to invest in other assets. As the TSO provider will not achieve the return
it could achieve in the market, its incentives to invest in assets to provide TSO
services will be undermined.”
As with any major investment in infrastructure, companies will only invest if they can
obtain an adequate rate of return on their investment, taking into account the inherent
risk of investment in the rapidly changing telecommunications market. Telecom will
be no different in this regard and we consider that no company would seriously
consider investing in the high-risk telecommunications market for a 6% annual return
on its investment.
3
Given the Government negotiated the TSO with Telecom, the Government obviously
placed importance on the delivery of TSO services on an ongoing basis (the TSO deed
having no end date). On this basis it would seem to the Federation that an underlying
principle of the Commission should be to ensure that the TSO provider is adequately
compensated for the services it delivers.
As an organisation representing a significant part of the rural community, the
Federation regards a low WACC as damaging to New Zealand’s future infrastructure
development and not an outcome consistent with the Government’s TSO policy or its
commitment to economic growth through investment in innovation.
In conclusion, we wish to ensure that the Commission, in its TSO costing decision,
results in an acceptable return on investment for Telecom and that the long-term risks
to rural customers of the TSO becoming financially unsustainable be factored into the
final decision of the Commission.
As our concerns expressed above are self-explanatory we do not deem it necessary to
appear before the Commission to speak to our submission.
Yours sincerely
John Paskohn Pask
Deputy Director, Policy