Commission determines new approach to infrastructure financing costs
The Commerce Commission has confirmed it will change the way it calculates financing costs for regulated infrastructure. This is aimed at providing greater stability for consumers and businesses by reducing the impact of short-term interest rate movements on regulatory settings.
Associate Commissioner Nathan Strong says financing costs are an important part of the regulation because infrastructure providers need to be able to attract investment to maintain and improve the essential services New Zealanders rely on.
“In capital intensive infrastructure sectors, the interest rates that suppliers pay can have a material flow through to consumers’ bills.”
As part of a review of its regulatory rules, the Commission has decided to adopt a five-year trailing average for estimating the risk-free rate used in calculating the interest rates applicable to debt held by regulated fibre, electricity and gas networks, and some airports.
“This change will reduce the influence of short-term interest rate changes on regulatory settings, while supporting continued investment in the country’s essential infrastructure.”
“Previously, the Commission determined interest rates for regulated suppliers’ debt using a three-month financing window immediately before the start of each five-year regulatory period.”
“Confirming the core approach now also provides regulated businesses with greater certainty as they consider their debt management strategies ahead of upcoming regulatory periods,” says Mr Strong.
“Using an averaged approach means our regulatory settings will be less sensitive to interest rates at a single point in time. It reduces the risk of a short-term spike or dip in interest rates being locked in for an entire regulatory period.”
“We know that both businesses and consumers value stability. The new approach will help contribute to a smoother transition when we set new revenue limits for regulated businesses for five-year regulatory periods,” says Mr Strong.
The Commission will consult on remaining design and transitional matters before the end of 2026 and expects all decisions to be finalised in Q3 2027. The new approach will take effect from the next regulatory period for each sector, beginning in 2029 for Chorus, 2030 for electricity lines businesses and 2031 for gas pipeline businesses.
Background
Under Part 4 of the Commerce Act, the Commerce Commission regulates monopoly infrastructure providers including Auckland, Christchurch and Wellington airports, Transpower and local electricity lines companies, and gas pipeline businesses. It also regulates Chorus and local fibre companies under Part 6 of the Telecommunications Act.
As part of this role, the Commission sets rules on how regulated businesses can recover their expected efficient costs, including interest costs on debt and the reasonable profit expectations of investors for the capital they have invested.
These rules are called input methodologies, and the Commerce Commission is required to publish and periodically review these to promote certainty for suppliers and consumers on our regulatory approach.
The Commission’s review of the Common cost of capital input methodologies (IMs) for Fibre and Part 4 sectors (electricity, gas, and airports) was initiated in 2025 and is due for completion in 2027. The Commission published a draft decision in March 2026.
Following submissions on the draft decision, the Commission reached a final view that adopting a trailing average approach to estimating the real risk-free rate for the cost of debt will be to the long-term benefit of consumers.
We also reached final views that:
- the length of the trailing average will be five years;
- the trailing average will be calculated as a simple (equally weighted) average;
- the term credit spread differential allowance currently provided for will be amended to provide for the necessary hedging costs of the suppliers who issue longer-term debt; and
- the three-month averaging period currently used for the prevailing approach will be maintained for the trailing average approach.
The change to a trailing average was supported by both regulated suppliers and consumer representatives.
Watercare is also regulated by the Commerce Commission under the Commerce Act. However, as it is not yet subject to input methodologies, we will consult separately with the water sector on the approach.