gearing and the difference between actual cost of debt and tax expense and the allowances for debt and tax Separation of measures of return on assets and equity into measures based regulatory information and statutory accounts. This is supported as it facilitates consistent but separate comparisons with other regulated businesses and unregulated businesses. Inclusion of RAB multiples. This is strongly supported. As argued in our earlier submission this is a widely used measure that provides relevant information on investor expectations on returns. The CCP 18 submission on the discussion paper provides further supporting information and analysis. Removal of economic profit. This is supported as it duplicated the comparison of regulatory returns with the allowed WACC The below draws aligns the different measures to the comparisons set out in the section on objectives of profitability measures and also highlights some of the outstanding issues in these comparisons that are discussed in the following sections. Table 4: Alignment of Objectives and Profitability Measures Issue Measures Comparisons and issues Systematic variations ROA (Regulatory) Comparison of actual returns and allowed ROA between actual and ROE (Regulatory) (grossed up for tax) and allowed ROE allowed returns? Highlights causes (interest, tax, incentives) Why? Variation in returns ROA (Regulatory) As Can highlight extent to which issues between NSPs? Why? ROE (Regulatory) are systemic or provider specific Are actual returns Comparisons with other regulated businesses comparable to: ROA (Regulatory) can highlight impact of differences in reg a) regulated ROE (Regulatory) regimes b) unregulated ROA (Statutory) Comparisons with other business (statutory industries risk ROE (Statutory) basis) provides a guide to reasonableness of level)? outcomes. Why? Will require careful analysis but essential – Are allowed returns in RAB Multiples Benchmark ranges need to be established line with expected Analysis required to away’ sources of ‘peel returns? Why? and implications for regulatory decisions Are returns increasing EBIT/customer, Comparisons over time only over time? EBIT/ Connection Shows trends in profits and impacts on users
gearing and the difference between actual cost of debt and tax expense and the allowances for debt and tax Separation of measures of return on assets and equity into measures based regulatory information and statutory accounts. This is supported as it facilitates consistent but separate comparisons with other regulated businesses and unregulated businesses. Inclusion of RAB multiples. This is strongly supported. As argued in our earlier submission this is a widely used measure that provides relevant information on investor expectations on returns. The CCP 18 submission on the discussion paper provides further supporting information and analysis. Removal of economic profit. This is supported as it duplicated the comparison of regulatory returns with the allowed WACC The below draws aligns the different measures to the comparisons set out in the section on objectives of profitability measures and also highlights some of the outstanding issues in these comparisons that are discussed in the following sections. Table 4: Alignment of Objectives and Profitability Measures Issue Measures Comparisons and issues Systematic variations between actual and allowed returns? Why? ROA (Regulatory) ROE (Regulatory) Comparison of actual returns and allowed ROA (grossed up for tax) and allowed ROE Highlights causes (interest, tax, incentives) Variation in returns between NSPs? Why? ROA (Regulatory) ROE (Regulatory) As Can highlight extent to which issues are systemic or provider specific Are actual returns comparable to: a) regulated ROA (Regulatory) ROE (Regulatory) Comparisons with other regulated businesses can highlight impact of differences in reg regimes b) unregulated industries risk level)? Why? ROA (Statutory) ROE (Statutory) Comparisons with other business (statutory basis) provides a guide to reasonableness of outcomes. Will require careful analysis – but essential Are allowed returns in line with expected returns? Why? RAB Multiples Benchmark ranges need to be established Analysis required to ‘peel away’ sources of and implications for regulatory decisions Are returns increasing over time? EBIT/customer, EBIT/ Connection Comparisons over time only Shows trends in profits and impacts on users