Assessment Principles for Efficient Prices
40. Chapter 5 (Assessment Principles for Efficient Prices) details the Commission's pricing principles which provide the basis of its building blocks assessment of the net benefits to acquirers.
41. The Commission considers the following generic pricing principles are suitable for determining efficient prices and normal returns:
- allocatively efficient prices should be set and normal returns should be earned over time;
- productive efficiency should be maintained over time. This requires the adoption of least cost production practices. The Commission engaged Meyrick and Associates to provide advice on the productive efficiency of the gas pipeline businesses; and
- dynamic efficiency should be maintained over time. This requires that over- or under-investment be avoided. The Commission's view is that there are no significant dynamic inefficiencies in the gas pipeline businesses.
Normal Returns
42. The Commission considers that over the life of an asset the returns discounted by an appropriate WACC should equal the initial investment amount. This is referred to as the Net Present Value (NPV) = 0 principle, and is adopted by the Commission in this Inquiry.
43. Normal returns need to be assessed over a period of time, so that singular events do not bias the results and thereby unduly influence the Commission's recommendations. The analysis period for most businesses under investigation covers the period 1997 - 2008, with the exception of Vector whose assessment covered the period 2000 - 2008.
44. Returns must be calculated using an appropriately determined asset base. The Commission has used ODV valuations in this Inquiry and a nominal WACC. The NPV = 0 principle requires any revaluation gains/losses on the assets to be treated as income.
Back to Top