Comcom – Covid-19 and Regulated Returns
The Covid-19 period coincides with the period the Commerce Commission uses when estimating several key parameters in its current Input Methodologies review. This creates a risk that the estimates which the Commission derives from data over the last three years are unduly influenced by Covid-19, incongruent with the forward-looking perspective of the IMs to apply to the period FY2023 to FY2027.
UK-based Flint Group published a report in June 2021 that detailed the implications of Covid-like events on the asset beta for Heathrow Airport and how adjustments can be made to avoid giving undue weight to the impacts of Covid. In our recent report for BARNZ, we apply the Flint methodology to estimate an appropriate asset beta for Auckland International Airport Ltd (AIAL).
We find that an event similar in nature and impact to COVID-19, occurring between once every 20 and once every 50 years, would increase the beta estimate for AIAL by between zero and eight basis points, compared to recent pre-COVID observed values. In practice, this means that, using CEPA’s estimate of the pre-Covid asset beta for AIAL of 0.69, an appropriate forward-looking estimate for the asset beta for AIAL that gives an appropriate (but not undue) weighting to the likelihood of a Covid-type event occurring in the future is likely to be in the range of 0.69 to 0.77, assuming a Covid-type event occurs in the future between every twenty and every fifty years.
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