assess Australia forecast revenue and costs for the purpose of assessing Australia Post’s proposed price increases. Post’s The ACCC notes that the difference between Diversified forecast of volume Specifics’ decline (i.e. an average 8.6 per cent annually) and the top of the range derived from ACCC analysis (i.e. 8 per cent) is immaterial for the purposes of modelling revenue projections in Australia draft price notification. In contrast the bottom of the range derived from the Post’s analysis (i.e. 6 per cent) is materially different to the upper bound and is close to ACCC’s historical volume declines (i.e. 5.8 per cent). However, the significant increases in letter prices, including the 43 per cent increase in the BPR proposed by Australia Post is greater than any historical price increase. As this creates uncertainty around the level of consumer and business responsiveness, the ACCC has accepted Diversified Specifics higher forecast volume decline. Cost of capital ACCC view In assessing Australia draft price notification, the ACCC has had regard to whether Post’s the estimated revenue generated is required to recover the efficient costs of providing its reserved services, including a return on capital. Generally, a return on capital should reflect the opportunity cost to investors of choosing to finance a operations. The return on firm’s capital is calculated as a weighted average of the opportunity cost of debt and equity, known as the weighted average cost of capital (WACC). Australia Post has submitted that a nominal WACC of 7.29 per cent should be ‘vanilla’ applied for its return on capital, based on a report by Value Adviser Associates (VAA). The view is that Australia proposed WACC is not appropriate and has derived an ACCC’s Post’s alternative WACC of 6.53 per cent. The WACC parameters proposed by Australia Post, and the parameters calculated by the ACCC, are set out below. Table Australia proposed WACC parameters, ACCC view – Post’s WACC parameter Australia Post proposal ACCC view Risk free rate 2.96% 2.79% Market risk premium 7.0% 6.0% Asset beta (βa) 0.60 0.56 Debt beta (βd) 0.15 0.00 Gearing ratio 30% 30%
assess Australia Post’s forecast revenue and costs for the purpose of assessing Australia Post’s proposed price increases. The ACCC notes that the difference between Diversified Specifics’ forecast of volume decline (i.e. an average 8.6 per cent annually) and the top of the range derived from ACCC analysis (i.e. 8 per cent) is immaterial for the purposes of modelling revenue projections in Australia Post’s draft price notification. In contrast the bottom of the range derived from the ACCC’s analysis (i.e. 6 per cent) is materially different to the upper bound and is close to historical volume declines (i.e. 5.8 per cent). However, the significant increases in letter prices, including the 43 per cent increase in the BPR proposed by Australia Post is greater than any historical price increase. As this creates uncertainty around the level of consumer and business responsiveness, the ACCC has accepted Diversified Specifics higher forecast volume decline. Cost of capital ACCC view In assessing Australia Post’s draft price notification, the ACCC has had regard to whether the estimated revenue generated is required to recover the efficient costs of providing its reserved services, including a return on capital. Generally, a return on capital should reflect the opportunity cost to investors of choosing to finance a firm’s operations. The return on capital is calculated as a weighted average of the opportunity cost of debt and equity, known as the weighted average cost of capital (WACC). Australia Post has submitted that a nominal ‘vanilla’ WACC of 7.29 per cent should be applied for its return on capital, based on a report by Value Adviser Associates (VAA). The ACCC’s view is that Australia Post’s proposed WACC is not appropriate and has derived an alternative WACC of 6.53 per cent. The WACC parameters proposed by Australia Post, and the parameters calculated by the ACCC, are set out below. Table – Australia Post’s proposed WACC parameters, ACCC view WACC parameter Australia Post proposal ACCC view Risk free rate 2.96% 2.79% Market risk premium 7.0% 6.0% Asset beta (βa) 0.60 0.56 Debt beta (βd) 0.15 0.00 Gearing ratio 30% 30%
ACCC%E2%80%99s%20view%20on%20Australia%20Post%E2%80%99s%20draft%20price%20notification%20-%202015.docx