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Published byValentine Higgins Modified over 8 years ago
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CIAL Pricing Reset 1 December 2012
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Why CIAL wishes to move to a medium term pricing methodology The key properties of the pricing model: how it works and main areas of disagreement How to interpret the results How CIAL uses the pricing model in making the pricing decisions Implications for PSE3 and beyond? Overview
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Context Integrated Terminal Project - investment of $237 million Doubling of Aeronautical Asset Base Implications for pricing Requires major price step in the short term ITP is efficient but will take time for full utilization Short-term pricing for long-term infrastructure assets is inherently inefficient New ITP Challenge is to avoid price shocks at periodic resets driven by investment cycle while recognising that future prices cannot be fixed
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In setting actual Prices these are capped by the levelised constant real price derived from the model Actual pricing seeks a balance between cost recovery and responding to market conditions CIAL is constrained by countervailing power and competitive conditons The model is a guide to prices, but price path set through applying commercial judgement Commercial Decision Making
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Defining the problem
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Seek to set a long run constant real price, by: Estimating cost of service every year Cost of service = pre-tax return on capital, return of capital and OPEX Calculating PV of cost of service Draw a line through the cost of service to obtain NPV = 0 What the model does The Key item in the model is the present value of 20 years of cost
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Total cost of service in any one year is an approximation because we do not match timing of tax paid in particular periods The Model calculate revenues from actual prices times forecast passenger/aircraft movements Levelised constant real price is the ceiling for intended price levels: hence, any time the price is below that level, the under-recovery is permanent In any one year, annual expected revenue will differ from costs How to interpret the model
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Revenue path and under- recovery
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Implied tax expense is not intended to be a correct estimate of tax payable in any one year But the only thing that matters for the constant real price level is the present value of tax allowance We developed a “check model” Key analytical issue: what is the discount rate to use for arriving at present value Key controversy: tax
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Tax expense v tax payable over 20 years Nominal cost over 20 years PV of cost over 20 years Discount rate Implied effective tax rate Tax expense $2,797m$650m13.67%28.0% Tax payable $2,797m$650m12.74%23.4% No present value difference if effective tax rate is about 24%
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We checked our forecast revenue against various methods of calculating cost of service CIAL forecast revenue in PSE2 is below both BARNZ and IM estimated cost of service IRR model demonstrates that expected return reflects competitive pressures and reasonable position taken and is less than Commission IM target range level of return 5yr IRR around 7% Profitability in PSE2
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We intend to take a consistent approach e.g. valuation methodology We expect actual prices to converge with long-run levelised constant prices, where future revenues will need to exceed cost in each year i.e. achieve NPV=0 However prices cannot be prejudged or fixed Obligation to consult with our customers Need to consider change in costs / future capex and updated demand volumes Market and competitive factors will continue to exert constraint on prices set Implication for PSE3+
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Thank you
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