Draft decision on cost of capital rules for regulated infrastructure services
The Commerce Commission has released its draft decision on proposed changes to how it calculates financing costs for regulated monopoly business like major airports, electricity lines, gas pipelines and fibre service providers.
Regular reviews of the core regulation rules – called input methodologies (IMs) – ensure regulated companies earn only a reasonable return on the essential services they provide. This prevents monopolies from charging too much, while still allowing them enough revenue to run, maintain, and upgrade their network.
Associate Commissioner Nathan Strong says, “People understandably want reasonable prices and reliable essential services. To achieve this, regulated businesses must be neither over‑ nor under‑compensated. We do everything within our powers to keep the cost of infrastructure as reasonable as possible to minimise price increases.”
The Commission’s review focused on assessing the way that interest rates and profitability requirements of regulated services (called weighted cost of capital) are calculated, as well as their reliability and ability to deal with changing economic factors.
The draft decision proposes that the current rules are largely fit for purpose and should remain in place. The Commission is proposing a small number of changes that are refinements of existing approaches but are not expected to change the calculated outcomes. The Commission’s approaches have been relatively stable since 2013 and have seen lenders and investors make over $21b in investment in regulated businesses since then.
The Commission considered a change to the way it sets the interest rate applying to regulated suppliers’ debt. The current approach places more weight on recent interest rates, but stakeholders have asked the Commission to consider whether using longer-term average interest rates would help to ensure smoother changes in prices when the Commission periodically resets how much the regulated businesses can charge. Resets are typically every four or five years.
“We have carefully examined, at an empirical level, the differences in outcomes between two approaches to the base interest rate, especially how each one impacts revenue or price changes when we reset them at the five-year regulatory reset," says Strong.
“Our draft decision on this issue is finely balanced, as there are trade-offs that need to be considered. Our analysis has found that the differences in approaches to setting the interest rate on debt would only make very modest difference to outcomes at each reset but would result in material increases in the complexity of the way in which we set price paths, raising costs for both the Commission and the regulated businesses.
"Transition arrangements to move from the current approach may also be costly and complex. Most importantly, the Commission already has the tools to smooth prices at resets without needing to smooth a single component of regulated suppliers’ financing costs.”
The Commission has made this empirical analysis available to show the possible quantitative effects for regulated businesses and how these affect their customers.
“We’d like to ensure there’s an informed understanding of the real, measurable effects of a change in approach, including how it could increase the complexity of the regulatory regime. We want to actively engage with stakeholders on this issue. Receiving considered and constructive feedback will be vital to inform our final decision,” says Strong.
The Commission has published an Explanatory Overview alongside the draft decision. It explains how the cost of capital works in practice and what the different approaches could mean in real life.
Submissions can be made until 5:00pm, 16 April 2026, with cross submissions due 6 May 2026.
Background
Under Part 4 of the Commerce Act, the Commerce Commission regulates monopoly businesses including major airports, electricity lines, gas pipelines and fibre service providers.
The Commission’s role in setting revenues and prices for monopoly infrastructure is intended to allow regulated businesses to cover their expected efficient costs, including interest costs on debt and the reasonable profit expectations of investors for the equity capital they have invested.
The Commerce Commission is required to publish its input methodologies to promote certainty for suppliers and consumers as to the upfront rules, processes, and requirements for our price-quality regulation and information disclosure requirements.
Since 2013, regulated suppliers under the Commerce Act and the Telecommunications Act have collectively invested around $21 billion in regulated assets.