AUCKLAND AIRPORT SUBMISSION TO THE COMMERCE COMMISSION INPUT METHODOLOGIES AND INFORMATION DISCLOSURE (AIRPORT SERVICES) 8 MARCH 2010
2 INTRODUCTION 1. This is Auckland International Airport Limited s ( Auckland Airport ) submission following the Commerce Commission s ("Commission") Input Methodologies and Information Disclosure Airports Workshop ( Workshop ) which was held on 17 and 18 February 2010. 2. This submission should be read together with the New Zealand Airports Association s ( NZ Airports ) submission ("NZ Airports submission"), on the basis that it incorporates and supports the NZ Airports submission and deals with certain points that are specific to Auckland Airport. 3. This submission should also be read in conjunction with all previous submissions made by Auckland Airport and NZ Airports as part of the Commission's consultation on input methodologies and information disclosure to be determined under Part 4 of the Commerce Act 1986 ("the Act"). 4. Auckland Airport welcomes the Commission's continued efforts to engage with interested parties on the development of input methodologies and information disclosure. 5. Auckland Airport will be pleased to provide any further information required in support of this submission. Auckland Airport s contact point for matters regarding this submission is: Simon Robertson Chief Financial Officer Auckland Airport Ph 09 255 9174 simon.robertson@aucklandairport.co.nz CONTENT 6. This submission is divided into two parts based on the topics discussed at the Workshop: Part A: Input Methodologies (i) (ii) Used and useful test and incentives to invest; and Investor expectations. Appendix A Statement of Alfred E. Kahn, August 10, 2001 ( Kahn Paper ). Part B: Information Disclosure (i) Rules of NZX regarding disclosure to investors.
3 PART A: INPUT METHODOLOGIES Used and useful test and incentives to invest 7. The application of a used and useful test to exclude assets from the asset base regulated by the Part 4 disclosure regime was discussed at the Workshop 1. The Board of Airline Representatives New Zealand Inc ( BARNZ ) has also submitted that assets held for future use, including Auckland Airport s Northern Runway, should be excluded from the initial information disclosure asset base 2. The RAB should not include assets which are not used and useful in providing the regulated service. Thus assets which are held for future use, assets which are not necessary to provide the regulated service and optimised assets should all be excluded from the RAB. 8. Auckland Airport refers to the NZ Airports submission s discussion of the applicable legal definitions of specified airport services, and the inappropriateness of using a used and useful test to exclude assets from the disclosed asset base. The following discusses Auckland Airport's specific concerns. 9. Auckland Airport is concerned that by adopting a used and useful approach, the Commission will exclude assets held for future use from the information disclosure asset base. As previously submitted by Auckland Airport, an approach that excludes assets held for future use severely risks undermining legitimate investment choices and has potentially significant negative consequences for the broader national economy 3. As discussed below, consultation under the Airport Authorities Act 1966 ( AAA ) and commercial disciplines mean that Auckland Airport has absolutely no incentives to invest inefficiently. 10. Auckland Airport therefore emphasises NZ Airports' point that the Commission must appreciate that it is required to establish an asset base for information disclosure only, and should not be concerned about the timing of the recovery of those investments, 4 which is a matter that should be addressed under the AAA. 11. Further, as submitted by NZ Airports, the Commission's adoption of the used and useful 5 test during the Airfields Inquiry was for pricing purposes. To adopt a used and useful test in the information disclosure context amounts to an attempt by the Commission to deduce whether airports have invested efficiently or not, which Auckland Airport submits is a prime example of how information disclosure can in fact amount to de facto price control. 12. Taking Auckland Airport's Northern Runway as an example, exclusion of this significant investment from the information disclosure asset base would generate considerable uncertainty for the business. Auckland Airport would be under extreme pressure to adjust the recovery of its investments to accord with the Commission's views. Consultation on this point under the AAA would become meaningless. 13. The following explains in further detail why Auckland Airport's investment in the Northern Runway is efficient, which should give comfort to the Commission that seeking to 1 Transcript, Airports Workshop 17 February 2010, pages 20 to 23 2 BARNZ submission on Emerging Views Paper dated 3 February 2010, page 17 3 Auckland Airport submission on Emerging Views Paper dated 29 January 2010 4 NZ Airports Association, Post-Workshop Submission, 8 March 2010, from paragraph 88 5 NZ Airports Association, Post-Workshop Submission, 8 March 2010, from paragraph 89
4 optimise the information disclosure asset base is unnecessary (in addition to being inappropriate). Negative consequences on incentives to invest 14. Auckland Airport considers itself to be a responsible investor. As a commercial operator Auckland Airport is required to manage the needs of customers (including airlines and travellers), shareholders and wider societal expectations (noting the airport s significant contribution to regional and national economic growth). As submitted in our response to the Input Methodologies Discussion Paper, Auckland Airport has no incentives to invest inefficiently, and in fact bears the risk of carrying surplus capacity. 15. Major projects, such as Auckland Airport s planned Northern Runway, are essential to ensuring that future demand for aeronautical services, and the requirements of the consumer, can be met. Given the nature of such projects, planning and preparation is required well in advance of actual construction. Preparation can include, but is not limited to, land purchase and holding, preparatory works, such as levelling, and obtaining necessary resource consents. This view is not exclusively held by airports. As noted in the recently released National Infrastructure Plan 6 : Each airport manages its own capital investment. A notable feature of planning at airports is that their infrastructure plans generally have a longtime horizon, of 20-50 years. Necessity for long-term planning also means that certainty of land holdings is critical for airports, and airports often own large areas of surplus land that will be required for future development. Airport infrastructure investment tends to be costly, lumpy and irregular. Investment in facilities that may be intended to meet long-term future needs often faces opposition from airlines that operate on a shorter timeframe. Airlines are understandably reluctant to pay for infrastructure that may exceed their immediate needs. 16. If Auckland Airport is not entitled to earn a reasonable return on land being held for future use, the rational commercial step is to dispose of the holding or develop it for nonaeronautical use. This could adversely impact the timing of, for example, the future development of a second runway, or make the development prohibitively expensive (either at Auckland Airport or another site within the Auckland region). Such an outcome would clearly not be in the long-term interests of consumers. Relevant economic principles 17. In 2001, Auckland Airport asked Professor Alfred Kahn his opinion on two issues raised by the Commerce Commission in its then draft report, Price Control Study of Airfield Activities at Auckland, Wellington and Christchurch International Airports: Should land held for future airport development be excluded from the asset base when determining whether current and prospective returns are excessive?; and Are the pricing principles that only used and useful assets should be included in the asset base and that today s users should bear today s costs economically sound? 6 National Infrastructure Plan, March 2010, page 96
5 18. Professor Kahn commented that that the Commission, at the time, did not seem to pose the question of whether or the extent to which the costs of pre-financing of new investments that will be used and useful should or should not be part of the marginal costs on the basis of which efficient prices are to be set. Professor Kahn thought that encouragement of airports to only undertake investments that would be used and useful was unexceptionable, but was concerned that a methodology that provides such incentives arbitrarily excludes such pre-financing costs as are associated with such new investments as will in fact be used and useful, and that economic efficiency requires be incorporated in price. 19. Professor Kahn thought that the principle that today s users should only bear today s costs is meaningless in an industry with lumpy, long lived assets, fails to recognise the causal effect of today s demand on the investment requirements of tomorrow and accords neither with fairness nor economic efficiency. He concluded that the unexceptionable principle is that it is wrong to charge present consumers for costs for which they are not causally responsible, but that this was not the case of the costs of land Auckland Airport is holding for its planned second runway. 20. A copy of Professor Kahn s paper is attached to this submission. We would encourage the Commission to review the paper before it reaches any binding views. Addressing specific comments from BARNZ 21. During the Workshop BARNZ made reference to Auckland Airport assets that it considered should be optimised out of the information disclosure asset base. These included assets to the south east of Auckland Airport s runway 7. 22. The area referred to by BARNZ is required for aeronautical purposes. Part of it is an area that has side slope issues in terms of the clearance that is required from the main centre line of the runway. Part provides access to the harbour at low tide which is an ICAO requirement. 23. The area also includes Wiroa Island. Far from being surplus to requirements, Wiroa is key to enabling the safe operation of aeronautical services. Wiroa Island houses a power centre for the lighting of the runway, radar and aerial facilities (these need to be separated from buildings to avoid interference), a fire training area (a safe area for training and to burn aviation gas) and a bird roost (to attract birds away from the runway and mitigate the occurrences of bird strikes). In addition, the eastern approach also hosts landing lights and has height restrictions which are required for safety. Investor expectations 24. Air New Zealand Limited ( Air New Zealand ) and BARNZ have both commented on investor expectations in their respective pre Workshop submissions. Air New Zealand also provided copies of public statements by analysts in support of its assertion that investors did not expect that valuations under the new Part 4 of the Commerce Act would be at the level of 2009 valuations 8. 25. As noted in the NZ Airports submission, the information provided by Air New Zealand only records investors reactions to key events since the Government announced that 9 airports would be included in Part 4 of the Commerce Act. The analysts articles referred to provide no more than commentary on relevant decisions taken since 2007. 7 Transcript, Airports Workshop 17 February 2010, pages 11 to 13 8 Annexes to Air New Zealand s submission on Emerging Views Paper dated 3 February 2010 9 NZ Airports Association, Post-Workshop Submission, 8 March 2010, from paragraph 122
6 The earliest analyst commentary provided by Air New Zealand is dated 27 June 2008, with the vast majority prepared during 2009. The cited commentary is neither a true reflection of investor expectations nor does it deal with the period prior to the new regulation era being signalled. 26. The commentary cited by Air New Zealand dated 27 June 2008 declares that the worst case outcome under [the] CC review into airport pricing would be the exclusion of asset revaluation for price setting purposes from June 2006 onwards plus the valuation of airfield land at opportunity cost versus direct sales comparison. This comment suggests that in the mind of this one analyst the worst case would still include revaluations from 2002 to 2006, which appears to be the period in history that the airlines are most concerned about. We note that the analyst did not provide a weighting of probability in relation to this worst case being actualised and nor did the analyst provide a view on a best case scenario. 27. We also note that the investor analysts reports provided by Air New Zealand indicate that with the publication of the input methodology discussion paper by the Commerce Commission the valuation of Auckland Airport in their models went down. This would indicate that the analysts quoted by Air New Zealand did not believe, prior to the publication of the input methodology discussion paper, that the options raised in the discussion paper were the reasonable expectation of those analysts. 28. The Commission should also note that the ten commentaries referenced by Air New Zealand in its pre Workshop submission are from only two sources, and that eight of the ten papers are authored by the same analyst. Whilst we do not call into question the capabilities of the analysts concerned, we do question whether the views of such a narrow spectrum of observers can, in any way, be taken to accurately reflect the views of the wider body of sophisticated and well informed investors. 29. Air New Zealand also refers to Auckland Airport s $1.4 billion revaluation in 2006 and implies that the entire $1.4 billion was included in disclosure under the AAA. The revaluation of assets across the whole company in 2006 was $1.4 billion, however, the vast majority of this revaluation referred to non-identified aeronautical activities. Contrary to the views of Air New Zealand the investment community did not treat the revaluations with suspicion. The revaluations only closed the gap between the investors valuation of the company as per the share price and the fair value of the assets as per the valuation. 30. Further, Air New Zealand quotes from a recent Auckland Airport prospectus. It is important for the Commission to understand that the New Zealand securities law and practice requires Auckland Airport s directors and senior management disclose to potential investors all of the material risks of their potential investment. The approach taken to this disclosure is very conservative and no weighting of the likelihood of such risks actually eventuating is included. It is up to investors to assess the likelihood of risks to the business occurring.
7 PART B: INFORMATION DISCLOSURE Rules of New Zealand Stock Exchange ( NZX ) regarding disclosure to investors Overview 31. The Commission has proposed that regulated airports be required to publicly disclose forecast and asset management planning information, which may include, among other things: (c) capital and operational expenditure forecasts; demand forecasts; and the key components of regulated total revenue and costs, (together, the "Forecast Information"). 32. At the conclusion of the Workshop, Commissioner Duignan queried submissions that suggested that the rules of the NZX regarding investors are a reason for the Commission to refrain from requiring release of forecast information to interested parties 10 : Just in regard to what has been covered generally, I suppose listening I am struck by a paradox that in a number of the submissions that have come forward it's been suggested - well there are two key areas; that the rules of the NZX regarding disclosure to investors are being put forward as a reason for the Commission to refrain from requiring release of information to interested customers. And I don't think that I can - let's put it this way, to the extent that that's reflected in submissions it would need to be accompanied by an explanation as to why the Commission should privilege investors and conformity to that requirement over the issue of the interests of consumers. The two pieces may have a clash but it is not obvious, I'm leaving it to you to explain, that it should be resolved in the favour, really, of the investors, or rather of a simpler life for the airports. 33. There will be significant implications in terms of Auckland Airport's continuous disclosure obligations under the NZX Listing Rules ("Listing Rules"), arising from the Forecast Information being publicly disclosed and, as Auckland Airport is also listed on ASX and subject to continuous disclosure obligations under the ASX Listing Rules (which are substantially the same as those of the NZX), our comments in this submission therefore apply to the continuous disclosure obligations under both sets of listing rules. Continuous disclosure obligations 34. Auckland Airport is a listed entity, and therefore subject to the Listing Rules. Under the Listing Rules Auckland Airport is required to release to NZX (and therefore to the market), any "Material Information" immediately after Auckland Airport becomes aware of that Material Information. The Listing Rules define "Material Information" as information that a reasonable person would expect, if it were generally available to the market, to have a material effect on the price of Auckland Airport's shares. 10 Transcript, Airports Workshop, 18 February 2010, pages 83 and 84.
8 35. However, the Listing Rules provide that Material Information does not have to be disclosed where the following three limb test is met: (c) A reasonable person would not expect the information to be disclosed; and The information is confidential and its confidentiality is maintained; and One or more of the following applies: (i) (ii) (iii) (iv) (v) the release of the information would be a breach of law; the information concerns an incomplete proposal or negotiation; the information comprises matters of supposition or is insufficiently definite to warrant disclosure; the information is generated for the internal management purposes of the Issuer; or the information is a trade secret. Forecast Information 36. Although Auckland Airport does provide to the NZX forecasts of its expectations as to annual performance, it does not currently provide the level of detail contained in the Forecast Information to the market. This position is reasonably common amongst NZX listed issuers. Auckland Airport considers that the Forecast Information comes within the exception to the disclosure requirement set out above, as: (c) a reasonable person would not expect the information to be disclosed. The guidance to the Listing Rules provides that this condition will be met where the release of the information would materially prejudice Auckland Airport. Forecast Information is by its nature difficult to predict with any certainty especially to the level of detail required by the Forecast Information. Where listed issuers provide forecast information they become under an obligation to update the market as circumstances change. No reasonable person would in our view expect such information to be disclosed; the information is confidential. It has not been divulged outside of Auckland Airport personnel and is only provided to airlines subject to strict confidentiality requirements for the purposes of Airport Authorities Act pricing consultation; and the Forecast Information: (i) (ii) is insufficiently definite to warrant disclosure, due to the inherent uncertainties involved in preparing financial forecasts; and has been generated for the internal management purposes of Auckland Airport. 37. However if the Forecast Information is required to be disclosed to the public in accordance with the Commission's proposal, this exception above will no longer apply as the information will no longer be confidential. Accordingly, the information will be
9 required to be disclosed to NZX immediately prior to being disclosed pursuant to the Commission's request. 38. In addition, as discussed above the disclosure of the Forecast Information may result in Auckland Airport being required to make further NZX disclosures. The Forecast Information, by its very nature, is relatively uncertain and is likely to change as a result of changes to any number of circumstances. If the Forecast Information has been disclosed to the market, and there are any such changes which are material, it is likely that Auckland Airport will be required to disclose those changes to NZX and the market. The Guidance Note on Continuous Disclosure published by NZX in January 2005 addresses this issue, stating that: a material change to prospective information such as forecasts is likely to require disclosure. 39. Therefore, the requirement to disclose Forecast Information to the public will likely result in Auckland Airport being required to provide further disclosures to NZX and the market to update any forecasts that have materially changed due to changes in circumstances after the date of the disclosure. Conclusion 40. Accordingly, we respond the Commission's question as follows: (c) (d) (e) The Listing Rules provide a rigid and comprehensive regulatory regime to ensure that all material information regarding company performance (which could impact share price) is provided to investors (who are interested persons under Part 4). As explained above, under the Listing Rules Auckland Airport is entitled to withhold the Forecast Information from investors; To the extent that the Forecast Information is a relevant input for pricing for specified airport services, then airlines will receive it in confidence under the AAA consultation. Airlines are interested persons under Part 4; We therefore seriously question how or why it is necessary for the Forecast Information to be disclosed to other interested persons under Part 4, such as passengers, to assess the performance of airports. Our primary submission on this issue throughout this consultation process has been and remains that disclosure of Forecast Information is unwarranted under Part 4; Accordingly, this is not really an issue of privileging investors over the interests of consumers. Rather, our submission is that disclosure of the Forecast Information in fact has no bearing on the interest of consumers (as per the Part 4 purpose statement) because disclosure will not assist interested persons to assess the performance of airports (as per the information disclosure purpose statement); However, disclosure of the Forecast Information will have a bearing on the interests of investors in Auckland Airport. They will bear the compliance costs of continuous disclosure of information which they would otherwise have no interest or entitlement to receive under the Listing Rules. We therefore remind the Commission of its obligations to only impose proportionate and cost effective regulatory requirements.
41. If the Commission adheres to its proposal to require such information to be disclosed then it will be important for the Commission to exercise its power under section 53ZG of the Act to ensure that the Forecast Information remains confidential. In that case the exception set out above would likely continue to apply provided that Auckland Airport remained satisfied that the information continues to be confidential (and is also satisfied that the other limbs of the test continue to apply), in which case the information would not be required to be disclosed by Auckland Airport to the market. 10