Developing regulatory pricing models (building block method)
Australian regulators rely heavily on the building block model to determine prices for regulated enterprises. This model builds up each element of an organisations costs (asset charges, operating and maintenance costs, expected tax etc.) to estimate a maximum allowable revenue which is then used as the basis for determining prices. NineSquared has built building block pricing models for major rail and port organisations and in doing so has developed a detailed understanding of the complexities of the model, particularly with respect to the roll forward of the asset base and the integration of capital expenditure into the pricing.
The regulatory building block model has been used as the basis for a number of commercial arrangements between infrastructure users and infrastructure owner even when the asset (or pricing) is not directly regulated. These arrangements are detailed in legal documents and then conceptualised into an Excel model that are used to derive prices. NineSquared has undertaken a number of reviews and audits of these pricing models to ensure there is consistency between terms of the agreements and their actual application. The result has typically been a material change in the price being charged.
Regulated businesses go through 'regulatory cycles' at the end of which the parameters which define how the business can be operated and priced are reviewed and reset. NineSquared has a strong track record in helping both regulated entities and companies that are major customers of regulated businesses prepare for and negotiate these review processes, including drafting responses to Draft Decisions, drafting technical papers on specific aspects of the review (for example user funding and operator margins) and presenting arguments with respect to the WACC.
Assessing regulatory impacts
Assessment of the economic and commercial impacts of regulation is a critical part of designing good regulatory frameworks that meet government’s objectives at lowest cost. NineSquared use a number of economic and commercial frameworks and concepts to provide advice to both governments and the private sector about the impact and incidence of existing or proposed regulatory frameworks. To assess these impacts, considerations of factors such as industry structure, the potential for contestability and the existence of market failure all need to be considered.
NineSquared offers clients a strong understanding of the economics of regulation balanced with an understanding of the practical and commercial realities of industry to ensure practical, sound advice to both governments and the private sector about the impact on regulation.
Please contact one of our experts in regulatory economics for more information on our capabilities and experience.
Tom Frost – Director. Tom is an economist who has been consulting to industry and government for almost 20 years. He has extensive experience in the provision of regulatory and economic advice to clients. He has provided advice to clients across Australia and internationally regarding investment in transport infrastructure.
Robin Barlow – Director. Robin has more than 20 years experience working in the transport sector and in government. He has worked for the Commonwealth government as an economist at the Industry Commission and for the Queensland Government where he held a number of senior positions within TransLink.
Ken Sedgwick– Director. Ken specialises in public policy, economics, regulation and project assessment. He has extensive experience in the reform and performance assessment of government businesses and agencies, including departments and government owned corporations. He has analysed and advised on issues across many sectors, with recent prominence in the water sector.
A selection of recent projects in regulatory economics is shown below:
Review of Aurizon Network’s proposed pricing of the GAPE below rail services.
Assessment of regulatory decisions on rail pricing to QCoal.
Review of Aurizon’s proposed approach to costing its maintenance and operating expenditure.
Regulatory and competition assessment of bus contracting in Adelaide.