March Report to the ACCC. Working Capital. Relevance for the Assessment of Reference Tariffs. The Allen Consulting Group

Transcription

1 Mach 00 Repo o he ACCC Woking Capial Relevance fo he Assessmen of Refeence Taiffs The Allen Consuling Goup

2 The Allen Consuling Goup Py Ld ACN Melboune 4h Floo, 8 Exhibiion S Melboune Vicoia 3000 Telephone: (6-3) Facsimile: (6-3) Sydney 3d Floo, Faifax House, 9 Pi S Sydney New Souh Wales 000 Telephone: (6-) Facsimile: (6-) Canbea Level, 5 London Cicui Canbea ACT 600 Telephone: (6-) Facsimile: (6-) Peh Level 5, 44 S Geoge s Tce Peh WA 6000 Telephone: (6-8) 9 99 Facsimile: (6-8) 9 99 Online allcon@allenconsul.com.au Websie: The Allen Consuling Goup

3 Table of Conens Chape Oveview. Bief. Summay of Findings Chape 4 Guidance Povided by he Gas Code 4. Guidance Povided by Secion 8. of he Code 4. Woking Capial Inepeaion of he Poblem 0.3 Guidance Povided by Secion 8.4 of he Code Chape 3 4 Tage Revenue Timing Assumpions 4 3. PTRM Timing Assumpions 4 3. Alenaive Tage Revenue Fomulae 5 Chape 4 8 Assessmen of Bias in Tage Revenue Fomulae 8 4. Ouline of he Appoach 8 4. Empiical Tes of Timing Assumpions Timing Assumpions and Resuls fo he Moomba o Adelaide Pipeline 4.3 Conclusion 4 Appendix A 5 A. Deivaion of he PTRM (End of Yea Cash Flows) Tage Revenue Fomula 5 A. Deivaion of he Reun on Aveage Asse Base Tage Revenue Fomula 6 A.3 Deivaion of he Mid-Poin Timing Tage Revenue Fomula 6 A.4 Deivaion of he Coninuous Time Tage Revenue Fomula 7 The Allen Consuling Goup

4 Chape Oveview. Bief The Ausalian Compeiion and Consume Commission (he Commission) has engaged The Allen Consuling Goup o advise whehe i would be appopiae fo he Commission o include an explici (addiional) allowance in espec of woking capial in he cash flow assumpions ha guide is assessmen of efeence aiffs. In addiion o his wien epo, he Commission has asked ha an excel model be poduced o demonsae he mehodology employed fo assessing whehe such an allowance is appopiae, and apply he mehodology o a eal-wold example (namely, he Epic Enegy Moomba-Adelaide pipeline). The Naional Thid Pay Access Code fo Naual Gas Pipeline Sysems (he Gas Code), as well as he legislaion ha gives he Gas Code is legal effec, povides he legal famewok agains which his issue is consideed. In addiion, as will be elaboaed upon below, he paicula assumpions ha ae made abou he iming of cash flows will affec he assessmen of whehe an allowance in espec of woking capial is appopiae. The iming assumpions analysed in his epo deive fom hose implied by he Commission s appoach o cash flow modelling, as efleced in is Pos Tax Revenue Model (PTRM), alhough he implicaions of he ohe iming assumpions ha commonly ae adoped by egulaos ae also pesened.. Summay of Findings The pupose of his pape is o assess fom fis pinciples whehe an addiional allowance fo woking capial is appopiae, having egad o he elevan sauoy guidance. Accodingly, Chape begins wih a discussion of he guidance povided by he elevan povisions in he Gas Code, and hei implicaions fo he quesion of whehe an allowance in espec of woking capial is appopiae. I is noed ha he concen ha an addiional allowance in espec of woking capial is equied, can be inepeed as a concen ha he simple fomula adoped by he Commission when calculaing he age evenue o be facoed ino efeence aiffs is inappopiae. In paicula, i implies ha he implici assumpions in ha fomula abou he iming of cash flow in espec of opeaing aciviies may no accuaely eflec he ue iming of cash flow wihin a given yea, and so undesae he oppouniy cos associaed wih invesos funds. Focussing on woking capial alone implies ha only pa of he poblem is being consideed, howeve. A diffeence beween he assumed and acual iming of cash flow wihin each yea is a moe geneal concen he elevan quesion, in ligh of he guidance povided by he Gas Code, is whehe he implici iming assumpions fo all of he foecas cash flow wihin any yea povide a easonable poxy fo he ue iming of ha cash flow. The implicaions of he Commission s appoach have been dawn fom is publicaion, Ausalian Compeiion and Consume Commission, Pos-Tax Revenue Handbook, Ocobe 00, and he illusaive excel model available on he Commission s websie. The Allen Consuling Goup.

5 Chape 3 hen discusses he implici assumpions abou he wihin-yea iming of cash flows fo he age evenue fomula employed by he Commission in he PTRM, as well as hee ohe poenial age evenue fomulae. I is noed ha he fomula adoped by he Commission assumes ha he sevice povide eceives he shae of evenue in espec of capial coss on he las day of he yea. As evenue is eceived ove he couse of each yea, i would be expeced ha age evenue would ovesae he oppouniy cos associaed wih invesos funds, and so would offse any shofall in he cos of financing opeaing expendiue (ie, he equied eun on woking capial). I is noed, howeve, ha which of hese effecs dominae is an empiical issue. Chape 4 hen demonsaes how he exen of bias, if any, in he vaious simple age evenue fomulae may be esed, and applies ha mehodology o he case of he Epic Enegy Moomba o Adelaide pipeline. The model pemis assumpions o be eneed abou he acual iming of a sevice povide s cash flow ove a es yea, and hen uses hese assumpions o allocae he expendiue and evenue ove ha yea agains paicula days in he yea (wih some of he evenue and expendiue in espec of a yea ypically falling ino he nex yea). Once a poxy fo daily cash flow is deived, i is possible o calculae he pecise age evenue (coesponding o he iming assumpions) by conducing a discouned cash flow calculaion on a daily basis. Thus, o he exen ha hee is a diffeence beween he iming of expendiue and he eceip of evenue, he oppouniy cos associaed wih ha delay implicily is included in he pecise age evenue, iespecive of whehe ha expendiue would be classified as opeaing o capial expendiue fo financial accouning puposes. The pecise age evenue calculaion can hen be compaed o he age evenue deived fom he simple fomula and he bias (if any) deemined. A numbe of plausible assumpions wee adoped fo he wihin-yea iming of he cash flows fo he Moomba o Adelaide pipeline, and i was found ha he simple age evenue fomula used in he PTRM ovesaes he evenue equied by abou.8 pe cen (which can be inepeed as he exen o which aveage pices ae highe unde he PTRM appoach han equied). While he esuls showed ha hee would be a financing cos associaed wih opeaing aciviies, i is swamped by he favouable iming assumpions wih espec o he shae of evenue associaed wih capial coss. In addiion, i was found ha he exisence of he bias coninues even if exeme assumpions ae made abou he iming of expendiue and evenue eceips. Fo example, if i is assumed ha he sevice povide pays fo inpus on a daily basis as hey ae povided, and eceives evenue 90 days afe he end of each monh (ahe han 9 as a pesen), a favouable bias of 0.3 pe cen would emain. Again, while hese assumpions imply an incease in he financing cos associaed wih opeaing aciviies, any shofall in espec of hese aciviies is swamped by he favouable iming assumpions wih espec o he shae of evenue associaed wih capial coss. These esuls povide no aionale fo including an addiional allowance in age evenue o povide a eun on woking capial. Rahe, he esuls sugges ha, wee fuhe pecision o be sough in elaion o he wihin-yea iming of cash-flow which undepins he agumens fo a eun on woking capial hen he likely oucome is ha he moe pecise age evenue would be lowe han ha deived using he PTRM. A wide issue fo he Commission and one beyond he scope of his epo is whehe he age evenue fomula in he PTRM should be changed o educe he poenial fo bias (in favou of he sevice povide) ha has been idenified. The Allen Consuling Goup.

6 Seveal alenaive age evenue fomulae ae pesened in he epo, and he opion exiss fo he Commission o model he wihin-yea iming of evenue and coss fo a egulaed eniy fo a es yea (using he appoach descibed in his epo), and o make an explici adjusmen o age evenue o emove whaeve bias is found o exis. Agains his, howeve, simpliciy has a numbe of advanages including ha i adds o he anspaency of egulaion, and educes adminisaive and compliance coss. The level of impecision wih espec o he ohe facos ha affec he assessmen of efeence aiffs is also elevan when consideing he degee of pecision waaned wih espec o he wihin yea iming of cash flow. Ulimaely, hese ae ade-offs he Commission is bes placed o esolve. A elaed aea whee he Commission should conside change o he PTRM is wih espec o he mehod ha is used o adjus pices fo inflaion. This mae is discussed in foonoe 7. The Allen Consuling Goup 3.

7 Chape Guidance Povided by he Gas Code Neihe he Gas Code iself, no he legislaion ha povides i wih legal effec, makes any explici efeences o woking capial. 3 Secion 8. liss a numbe of objecives o be achieved when assessing efeence aiffs and efeence aiff policies. The meaning of hese objecives, and hei implicaions fo assessing whehe o no an allowance fo woking capial should be povided, is discussed fis. The discussion of he secion 8. objecives concludes ha he issue of whehe o no an allowance fo woking capial is appopiae equies consideaion of whehe he iming assumpions implici in he simple age evenue fomulae ha egulaos ypically adop, appoximaely eflec he acual iming of coss and evenue wihin a paicula yea. If he simple iming assumpions appoximae he acual iming of coss and evenue, hen he age evenue should povide an unbiased esimae of he oppouniy cos associaed wih invesos funds being ied up in he egulaed aciviy. Secion 8.4 of he Gas Code povides guidance on he calculaion of age evenue, and so hese povisions ae also discussed o assess whehe he guidance povided would vay he guidance povided by secion 8... Guidance Povided by Secion 8. of he Code The objecives specified in secion 8. of he Code ae as follows. 8. A Refeence Taiff and Refeence Taiff Policy should be designed wih a view o achieving he following objecives: (a) poviding he Sevice Povide wih he oppouniy o ean a seam of evenue ha ecoves he efficien coss of deliveing he Refeence Sevice ove he expeced life of he asses used in deliveing ha Sevice; (b) eplicaing he oucome of a compeiive make; (c) ensuing he safe and eliable opeaion of he Pipeline; (d) no disoing invesmen decisions in Pipeline anspoaion sysems o in upseam and downseam indusies; (e) efficiency in he level and sucue of he Refeence Taiff; and (f) poviding an incenive o he Sevice Povide o educe coss and o develop he make fo Refeence and ohe Sevices. A common head o mos of objecives is he concep of economic efficiency, being menioned expessly in wo of hem (objecive (a) and (e)), and being implied by hee ohes ((b), (d) and (f)). 4 Accodingly, he geneal concep of economic efficiency, and how economic efficiency concens influence economic egulaion, is consideed pio o discussing he meaning of he paicula objecives in secion 8.. The implicaions fo he assessmen of a eques fo an addiional allowance in espec of woking capial ae dawn heeafe. 3 Ineesingly, even Aachmen A o he Gas Code, which is a deailed lis of he cos iems ha may be aken ino accoun when assessing efeence aiffs, makes no efeence o woking capial. 4 While objecive 8. (c) does no diec aenion owads an aspec of economic efficiency, safey and eliabiliy (o, moe paiculaly, he efficien level of eliabiliy) ae consisen wih economic efficiency. The Allen Consuling Goup 4.

8 Defining Economic Efficiency Economic efficiency, in geneal ems, efes o a condiion unde which sociey s limied esouces ae used such ha he ne benefi o sociey is maximised, fo a given disibuion of wealh. An efficien use of sociey s esouces is geneally acceped as one in which: he mix of goods and sevices ha an economy poduces eflecs he elaive value ha sociey places on hose goods and sevices given he exen of sociey s esouces equied o poduce he especive goods and sevices (allocaive efficiency); 5 fims poduce he goods and sevices fo he minimum cos, which implies ha he lowes-cos combinaion of sociey s esouces (ypically defined geneically as land, labou and capial) is used, and he bes echnology is employed (poducive o echnical efficiency); and he mix of goods and sevices poduced, and he poducion pocesses employed by fims, change ove ime in esponse o changes in ases, echnology and ohe like facos ha is, so ha allocaive and poducive efficiency is mainained a each poin in ime (dynamic efficiency). Compeiion is widely egaded as he mos effecive means of deliveing economic efficiency, and in such an envionmen, pices play an impoan ole in coodinaing decenalised agens owads deliveing efficien oucomes. Fo example: In compeiive poduc makes, selles ae foced o educe he pice of hei poduc o he maginal cos of poducion, as ivals will be able o undecu and ake cusomes if hey pice above his level. Cusomes buy he bundle of goods and sevices ha povide hem wih he mos benefi, given he elaive pices and hei incomes. As he pices eflec he cos o sociey of poducing he goods and sevices, i would be impossible o e-configue he mix of poducion and povide his cusome wih a moe valuable bundle wihou haming anohe. 6 Compeiive poduc makes also foce selles o poduce he goods and sevices fo he lowes cos, as ivals would be able o undecu wee his no he case. Compeiive inpu makes ensue ha he pices ha fims pay fo hei inpus (land, labou and capial) eflecs he maginal cos of using he inpu o poduce he paicula good o sevice he cos eflecing he value o sociey of he ohe goods and sevices ha could have been poduced wih hese inpus. Thus, he pices poduced by compeiive makes induce fims o selec he combinaion of facos ha implies ha is goods and sevices ae poduced fo he minimum foegone poducion of ohe goods and sevices. 5 A fuhe equiemen fo allocaive efficiency is ha he allocaion of facos beween poducing cuen consumpion, and invesmen in ode o pemi highe levels of fuue consumpion, eflecs households pefeences fo cuen vesus fuue consumpion, given he ae a which cuen consumpion can be conveed ino fuue consumpion. 6 I is impoan o disinguish beween wha fims may be seeking o achieve in a compeiive make, and he oucome of a compeiive make. In economics, i is ypically assumed ha fims sive o maximise pofis, which would almos univesally imply a pefeence fo seing pices well above maginal cos, if all o mos of hei cusomes could be eained a hose pices. The pocess of compeiion, howeve, implies ha such picing policies ae no susainable, as cusomes would be los o ivals. Thus, he oucome of a compeiive make o an economis efes o he implicaions of he envionmen of ivaly on he agens opeaing wihin he make, and no o wha may be he subjecive inenions of hose agens. The Allen Consuling Goup 5.

9 The pocesses efeed o above also esul in an efficien mix of goods and sevices being poduced by he economy a any poin in ime. Cusomes would only be willing o pay an amoun up o he value hey place upon any good o sevice fo ha iem, and fims pay he cos o sociey fo he inpus equied o poduce any good o sevice. These pessues imply ha fims will find i pofiable o poduce he goods and sevices ha cusomes wan and so ha poducion will esul bu find i unpofiable o poduce goods and sevices whose cos of poducion o sociey exceeds he benefi and hese aciviies will no be undeaken. Whee, howeve, compeiion is weak o absen as may be he case in indusies chaaceised by naual monopoly echnologies (such as gas ansmission pipelines and disibuion sysems) he limied naue o absence of he pocess of ivaly may imply ha he foces idenified above no longe opeae (ha is, fims have make powe), and depaues fom economic efficiency may esul. A paicula concen is ha, whee fims have make powe, hey will se pices above maginal cos in ode o make highe euns, which in un leads o cusomes and fims swiching away fom he use of he paicula poduc whee his is socially desiable (allocaive inefficiency). 7 A fuhe concen is ha, while make powe imposes no baie o fims achieving poducive efficiency, he absence of ivaly may imply hee is less concen abou conaining coss and implemening he laes echnologies. Thus, make powe may also lead o a wasing of sociey s scace esouces. 8 I is o addess hese poblems aising fom make powe ha may jusify economic egulaion of such aciviies. I follows logically ha he appopiae objecive fo economic egulaion is ha egulaos sive o esoe economic efficiency. An equivalen means of descibing he objecive fo economic egulaion is ha egulaos sive o geneae he oucomes ha would have been poduced by a compeiive make, given he pedicion ha a compeiive make will geneae economic efficiency, as discussed above. As Pofesso Kahn has noed: 9 The main body of micoeconomic heoy can be inepeed as how, unde pope condiions fo example, of economic aionaliy, compeiion and laissez-faie an unegulaed make will poduce opimum esuls. So ha he single mos widely acceped ule fo he govenance of he egulaed indusies is egulae hem in such a way ha would poduce he same esuls as would be poduced by effecive compeiion, if i wee feasible. 7 Indeed, whee he echnology employed by fims is a naual monopoly echnology, a depaue fom maginal cos picing is ineviable. This is because such pices would no be expeced o ecove all of he fixed coss incued o povide he sevice, and so capial would no coninue o be aaced o he indusy ove ime. In his siuaion, efficien pices ae hose ha geneae a use of he paicula good o sevice ha is as close as possible as ha which would have occued had pices been se a maginal cos, which may involve seing pices wih fixed and vaiable componens, disciminaion beween diffeen ypes of uses based upon capaciy o pay, o ohe like saegies. 8 The poenial fo fims no o minimise cos is explained in he elevan lieaue wih efeence o depaues fom sandad economic assumpions (in paicula, he exisence of pincipal/agen poblems beween ownes and saff, and poblems of infomaion asymmey beween ownes, managemen and saff). The classic efeence is Leibensein, H., Allocaive Efficiency vs. X-Efficiency'. Ameican Economic Review, Kahn, A, The Economics of Regulaion: Pinciples and Insiuions, 988 (Wiley, New Yok), Vol, p. 7. The Allen Consuling Goup 6.

10 Tha said, when consideing he objecives fo egulaos, wo caveas should be bone in mind. Fis, as is clea fom he quoe fom Kahn above, he compeiive make oucome fo which egulaos should sive is he oucome of a noional make ha is, he make ha would poduce economic efficiency. Secondly, hee ae a numbe of consains o he pocess of egulaion, which may imply ha he efficien oucome in he pesence of egulaion may diffe fom he oucome ha would have occued in he absence of he make powe. 0 Applying Efficiency Concens o Economic Regulaion The pocess unde which egulaed chages ae deemined nomally follows a numbe of seps, which ae as follows. Fis, a age amoun of evenue is deived ( age evenue ), which is he amoun of evenue ha he egulaed chages will be designed o ecove. Secondly, eihe individual aiffs o a conol ove he baske of aiffs is esablished consisen wih he age evenue (fo example, he conol may apply ove he weighed aveage aiff, and he egulaed eniy may have flexibiliy ove he design of individual aiffs unde his cap). In pice cap o incenive based egulaoy egimes which includes mos of he egulaoy egimes in Ausalia hee is also a hid sep, which is o commi no o eview chages fo a pe-defined peiod of ime, and o define a fomula unde which individual aiffs o he cap on he baske of aiffs may move ove ime. I is also common unde pice cap egimes also o implemen measues designed o povide he egulaed eniy wih an incenive o delive he efficien level of sevice, and o pu in place ohe measues o enhance he incenives on he eniy o educe cos ove he peiod. The quesion of whehe an addiional allowance should be included in age evenue in espec woking capial concens only he fis of he seps idenified above. Fom he discussion of efficiency above, i follows ha hee ae wo compeing objecives ha a egulao mus conside when calculaing age evenue. Fis, he age evenue mus be sufficien o ensue ha he povision of he elevan good o sevice coninues (a leas o he exen ha he aciviy, o any addiional aciviy, coninues o delive ne benefis o sociey). Thus, evenue mus be sufficien o ensue ha exising facos coninue o be devoed o he egulaed aciviy, and ha invesmen coninues o be aaced o he indusy ove ime. Secondly, he age evenue should minimise he exen o which pices ae equied o depa fom maginal cos. Given he endency fo maginal cos picing o fail o ecove all of he fixed coss associaed wih a egulaed aciviy (ha is, whee he aciviy is chaaceised by a naual monopoly echnology), his ypically implies ha a educion in age evenue (a leas agains he pices ha would be se by a fim wih make powe) would be pefeed. The means by which hese objecives may be econciled is o se age evenue a a level ha is sufficien o ensue coninued sevice povision, bu no moe. 0 As an example of he second cavea, one of hese consains is he asymmey of infomaion abou such maes as he cos of undeaking he egulaed aciviy and he pice sensiiviy of cusomes beween he egulao and egulaed eniy. In he pesence of such consains, i may be opimal o implemen saegies ha imply a ade-off wih objecives (such as allocaive efficiency) in ode o alleviae infomaion asymmey poblems. The Allen Consuling Goup 7.

11 Invesmen will coninue o be aaced o an indusy ove ime if he value of he addiional evenue (ne of addiional coss) associaed wih any new pojec is equal o he cos of undeaking he pojec. An equivalen saemen is ha he invesos in he new pojec should expec o eceive a eun on hei invesmen (ne of addiional coss) equal o he oppouniy cos of hose funds, and he eun of hose funds ove ime. Moe fomally, if PC efes o he pojec cos, R i he evenue expeced a he end of peiod i, C i efes o he expeced ongoing coss associaed wih he pojec a he end of peiod i (which would be a combinaion of opeaing and capial coss), T is he expeced life of he pojec (afe which i is wohless), and is he (effecive) pe peiod discoun ae (which is se equal o he oppouniy cos of he funds), hen age evenue should be deemined such ha: PC = T Ri Ci i i= ( + ) () which is a familia pesen value calculaion. If he make value of he fuue cash flows associaed wih his asse a he end of peiod n is given by MV n, hen his elaionship can be e-expessed as: PC = = n Ri Ci + i i ( + ) ( + MV n n ) () Accodingly, hese equaions imply he age evenue he egulao deemines (which akes accoun of all of he asses equied o pefom he egulaed aciviies) should povide a seam of evenue, R i such ha: RAV 0 i n = = R C i i i ( + ) RAV + ( + ) n n (3) whee RAV 0 compises he egulao s view of he make value of asses a he commencemen of he peiod which includes he esidual value associaed wih invesmens made in pevious peiods and RAV n is he egulao s view of he make value of he asses a he end of peiod n, and R i and C i efe o all evenue and cos (including he cos of undeaking new pojecs) a ime i wihin he peiod. The oppouniy cos associaed wih invesing in any aciviy is he eun foegone by no invesing in alenaive aciviies (adjused fo he elaive isk of he invesmens). Thus, he oppouniy cos should eflec he eun ha could have been eaned in alenaive invesmens, adjused fo he elaive isk of he pojec in quesion. RAV n implicily includes he esidual value associaed wih new pojecs undeaken ove he peiod. The Allen Consuling Goup 8.

12 In pacice, egulaos ofen expess he age evenue calculaion in an accual accouning vesion ha is, as he sum of a eun on he egulaoy value of asses (including new invesmen foecas o occu ove he peiod), a eun of capial (depeciaion), and a foecas of opeaing expenses ove he peiod. Howeve, his fom of expessing he age evenue calculaion can be demonsaed meely o be a eaangemen of a pesen value calculaion, 3 and so will delive he same esuls fo a common se of assumpions. 4 Moe impoanly, o he exen ha he use of an accual accouning vesion of he age evenue fomula deliveed a maeially diffeen level of age evenue, hen ha appoach would no be consisen wih he achievemen of economic efficiency he elevan objecive is o povide a seam of evenue and a commimen o a egulaoy asse value a he end of he peiod ha has a make value equal o he egulaoy value of he asses a he sa of he peiod. Meaning of he Objecives in Secion 8. Wih he excepion of secion 8.(c), all of he objecives se ou in secion 8. of he Gas Code daw aenion o facos ha need o be consideed when assessing whehe he efeence aiff and efeence aiff policy ae consisen wih economic efficiency. The mos elevan of he objecives fo he mae a hand, and hei inepeaion in ligh of he discussion above, ae as follows. Povide he oppouniy o ecove efficien cos (8.(a)) his daws aenion o he equiemen fo he pocess by which age evenue is deemined o pu in place he condiions unde which capial will coninue o be aaced o he indusy. 5 Replicae he oucome of an efficien make (8.(b)) as explained above, his should be inepeed as an alenaive efeence o he pusui of economic efficiency, given ha he aionale behind he suppo of economiss fo compeiion is ha i will poduce efficien oucomes. No disoing invesmen incenives in pipelines o in elaed indusies (8.(d)) avoiding a disoion should be inepeed as an alenaive efeence o pomoing an efficien oucome. The equiemen o conside efficiency in he povision of he egulaed infasucue, amongs ohe hings, daws aenion o equiemen fo he deeminaion of age evenue o be such ha invesmen coninues o be aaced while sociey values he elevan sevice, which is he same faco conemplaed by secion 8.(a). The equiemen o conside he efficiency in he invesmen in upseam and downseam aciviies daws aenion o he need o esic pices fo he egulaed sevice o he minimum level equied ha is, o he level jus sufficien o ensue coninued invesmen. 3 4 This is demonsaed in Appendix A. The analyical link beween accuals and cash flow conceps fo boh egulaoy and accouning puposes, and he elevan academic lieaue, is discussed in Johnsone, D, Replacemen Cos Asse Valuaion and Regulaion of Enegy Infasucue Taiffs: The Poblems wih DORC, Depamen of Accouning and Finance, Univesiy of Wollongong, 00, pp The efeence o efficien cos also invies consideaion of a numbe of ohe issues, such as whehe he elevan cos is consisen wih poducive efficiency, and whehe he coninued povision of he sevice (o he povision of addiional sevice) povides ne benefis o sociey (ha is, whehe is povision is consisen wih allocaive efficiency). The Allen Consuling Goup 9.

13 Efficiency in he level and sucue of aiffs (8.(e)) he efeence o an efficien aiff level daws aenion o he need fo any diffeence beween egulaed chages and he maginal cos of sevice povision acoss all sevices o uses o be minimised, in un implying ha age evenue povides sufficien evenue o coninue o aac invesmen, bu no moe (as discussed agains 8.(d)). I follows ha he objecives in secion 8. of he Gas Code daw aenion explicily o he implicaions dawn fom a consideaion of economic efficiency, as discussed above.. Woking Capial Inepeaion of he Poblem In pinciple, when undeaking he pesen value calculaion implied by equaion 3 above, he poins in ime a which i is assumed ha evenue is eceived o expenses ae paid should eflec pecisely he expeced iming of hese cash inflows and ouflows. Theefoe, if evenue is expeced o be eceived monhly in aeas, and coss ae expeced fonighly o monhly, hen in pinciple a leas he pesen value calculaion should ake accoun of his iming. In he limiing case, cash flow ove he egulaoy peiod could be foecas and discouned on a daily basis, so ha he age evenue would eflec pecisely (a leas in expecaion ems) he oppouniy cos associaed wih invesos having hei capial ied up in he egulaed aciviy. This would imply ha age evenue fo yea would be found by finding R i, such ha: 6 RAV 365+, open = i= Ri, Ci, RAV + i ( + ) ( + ), close 365 (4) whee R i, and C i, now efe o he foecas of daily evenue and coss fo yea, RAV,open and RAV,close efe o egulaoy value of he asses a he opening and closing of yea, and he ohe vaiables ae defined as befoe. 7 In pacice, howeve, he vaious fomulae egulaos ypically use o calculae age evenues only make use of annual foecass of cos and evenue, and make vey simple assumpions abou he iming of eceip of evenue and paymen of expenses wihin any paicula yea. The diffeen age evenue fomulae, and he pecise iming assumpions implied by each, ae descibed in deail in Chape 3. The adopion of a simple appoach fo calculaing age evenues, and eliance only on annual foecass, has significan aacions i boh adds o he anspaency of egulaoy decision making pocess, and also educes he cos of complying wih egulaoy equiemens. An impoan issue o conside, howeve, is whehe he age evenue deived fom one of he simple age evenue fomulae wih he simple assumpion abou he iming of coss and evenue wihin each yea povides an unbiased foecas of he age evenue ha would be deived wee egad had o he acual iming of cash flow wihin he yea, o whehe a maeial bias is ceaed eihe in favou o agains he egulaed eniy. 6 The summaion is ove 365+ peiods because he some of he evenue eceips o expendiue may fall ove ino he nex yea If he effecive annual discoun ae is given by *, hen = ( + *). The Allen Consuling Goup 0.

14 In simple ems, a ne woking capial equiemen will aise wheneve evenue is eceived afe opeaing expenses ae paid, on aveage. As hee is a peiod of ime fo which invesos funds ae ied up, a cos is imposed ha cos being he foegone eun ha could have been eaned by invesing hose funds in anohe aciviy and eaning a eun in he inevening peiod, o euning he funds o shaeholdes and pemiing hem o do he same. 8 Clealy, if he age evenue calculaion efleced he acual iming of evenue eceips and coss incued wihin he peiod (ie, equaion 4 wee used), hen an allowance fo he oppouniy cos associaed wih woking capial auomaically would be efleced in he age evenue as calculaed. Theefoe, o claim ha an addiional allowance in espec of woking capial is equied amouns o saing ha he wihin yea iming assumpions fo he shae of evenue and coss associaed wih opeaing aciviies implied by he simple age evenue fomula ae incoec, and ha he diffeence ceaes a maeial bias agains he sevice povide. Focussing solely on he shae of evenue and coss associaed wih opeaing aciviies implies ha only pa of he poblem is being consideed, howeve. As discussed above, he guidance povided by he objecives in secion 8. of he Gas Code diec aenion o whehe age evenue is sufficien bu jus sufficien o coninue o aac invesmen ino he indusy, which equies consideaion of all evenue and all coss. 9 Theefoe, he elevan quesion is whehe he simple assumpions implici in he age evenue fomula abou he wihin yea iming of all evenue and all coss ae easonable, o whehe a ne maeial bias is ceaed. Thus, while i may be he case ha he implici iming assumpions wih espec o he opeaing aciviy s shae of evenue and cos undesaes he oppouniy cos associaed wih invesos funds, his may be offse by he oppouniy cos associaed wih capial asses being ovesaed and i is he ne effec ha is elevan..3 Guidance Povided by Secion 8.4 of he Code Secion 8.4 descibes hee appoaches ha may be used o deive age evenue, which ae: Cos of sevice appoach age evenue is calculaed as he sum of a eun (equal o he esimaed cos of capial) on he egulaoy value of he asses, depeciaion and opeaing and mainenance expenses; NPV appoach age evenue is calculaed by finding he amoun of evenue ha would delive a pesen value of fuue evenue (and he esidual value a he end of he egulaoy peiod) equal o he egulaoy value of he asses a he sa of he peiod, whee he discoun ae is he esimaed cos of capial; and IRR appoach age evenue is calculaed by finding he amoun of evenue ha would delive an inenal ae of eun equal o he esimaed cos of capial. 8 The sock of ne woking capial a he end of a epoing peiod is ypically defined fo accouning puposes as he diffeence beween cuen asses (such as accouns eceivables) and liabiliies (such as accouns payable). To he exen ha he amoun of money no ye eceived exceeds he amoun of bills no ye paid, a financing cos aises. 9 Indeed, he jusificaion fo a eun on woking capial is no diffeen o he equiemen fo a eun on capial asses. In boh cases, invesos commi funds a a poin in ime, have hei funds euned a some ime in he fuue, and in he meanime equie a eun on hose funds o compensae fo he oppouniy cos. The only diffeence beween he eamen of woking capial and capial coss is he lengh of ime duing which he funds ae ied up wihin he egulaed eniy wheeas fo woking capial, funds may be ied up fo a mae of weeks, fo he lae funds may be ied up fo upwads of foy yeas. The Allen Consuling Goup.

15 The NPV and IRR appoaches coespond pecisely o he geneal age evenue calculaion defined in equaion 3, he Cos of Sevice is he accual accouning vesion of his calculaion ha was descibed above and, as noed aleady, all hee appoaches will delive an idenical age evenue calculaion (fo a common se of assumpions). Theefoe, he guidance povided by secion 8.4 of he Gas Code on he geneal appoach fo calculaing age evenue is idenical o ha which is implied by a consideaion of secion 8.. A elevan quesion is whehe he way in which hese appoaches ae descibed in secion 8.4 povides any addiional consains as o how hey should be applied in paicula, whehe guidance is povided as o wha iming assumpions should be made, o wih espec o he degee of pecision o be made wih espec o he iming assumpion. The descipion of he NPV and IRR appoaches do no specify he assumpion ha should be made abou he iming of cash flows wihin each yea of he egulaoy peiod, and he Cos of Sevice appoach is only oulined in boad ems. Tha is, no guidance is povided on whehe all evenue should be assumed o be eceived, and coss incued, a he end of each yea, o whehe he iming of boh should be assumed o be he mid-poin wihin each yea, o whehe cash flows should be assumed o occu coninuously a a consan ae, o whehe explici assumpions should be made abou he iming of cash flows wihin any paicula yea. The one poenial consain on he fomula o be adoped when calculaing age evenue is he equiemen ha any of he mehodologies be applied in accodance wih geneally acceped indusy pacice. A lieal inepeaion of his clause is difficul, howeve, as he calculaion of age evenues fo he pupose of seing egulaed chages would no nomally be undeaken ouside of egulaoy auhoiies o eniies ineacing wih egulaos, and so i would be difficul o claim ha hee is a geneally acceped indusy pacice. Tha said, pesen value calculaions ae widely used fo a vaiey of ohe puposes in indusy. An assessmen of he vaiey of puposes fo which discouned cash flow analysis is used suggess ha he equiemen o have egad o geneally acceped indusy pacice does no povide much guidance. A one end of he exeme, when assessing he value of a new pojec, i would appea common pacice o make he simplifying assumpion ha evenue is eceived, and coss incued, only once a yea, and hen, he common assumpion would appea o be ha cash flows occu a he end of each yea. Tha said, his implici iming assumpion is no univesally advocaed, wih Bealey and Myes, a leading finance ex, suggesing ha an assumpion of coninuous cash flows may be moe appopiae: 0 Thee is a paicula value o coninuous compounding in capial budgeing, whee i may ofen be moe easonable o assume ha a cash flow is spead evenly ove a yea han ha i occus a a yea s end. A he ohe end of he exeme, vey pecise assumpions abou he iming of cash flows ae made when valuing bonds o ohe inees beaing poducs, and he implicaions of he iming of he cash flows fo he value of he poducs well undesood. As Damodaan noes: 0 Bealey, R and S Myes, Pinciples of Copoae Finance, (McGaw-Hill, 5ed,) 996, p. 44. Damodaan, A, Applied Copoae Finance, (Wiley), 999, p. 56. The Allen Consuling Goup.

16 In he examples [of calculaing pesen values] above, he cash flows wee assumed o be discouned and compounded annually In some cases, howeve, he inees may be calculaed moe fequenly, such as on a monhly o semiannual basis. In hese cases, he pesen and fuue values may be vey diffeen han hose compued on an annual basis. Similaly, hee is evidence ha analyss employ (o a leas, popula exs ecommend) some pecision wih espec o he assumed iming of wihin yea cash flows when valuing equiies based upon he value of fuue dividends (o, alenaively, calculaing he cos of equiy ha is implied by he cuen shae pice and expeced dividends, such as wih he dividend gowh model). As an example, Moin noes: I is a udimenay ene of secuiy valuaion heoy ha when deemining inveso equiemens, he cos of equiy is he discoun ae ha equaes he pesen value of fuue cash eceips o he obseved make pice. Clealy, given ha dividends ae paid quaely and given he obseved sock pice eflecs he quaely naue of dividend paymens, he make equied eun mus ecognise quaely compounding Since invesos ae awae of he quaely iming of dividend paymens and since he sock pice aleady fully eflecs he quaely paymen of dividends, i is essenial ha he [discouned cash flow] model used o esimae equiy coss also eflec he acual iming of quaely dividends. Consisen wih his, while he simples of he vesions of he dividend gowh model assumes implicily dividends ae paid annually, ohe vesions ha ake accoun of semi-annual o quaely dividend paymens and ohe efinemens, such as non-consan dividend gowh, ae in common use. Theefoe, i would appea ha secion 8.4 of he Gas Code povides no fuhe guidance elevan o he assessmen of whehe an allowance fo woking capial is equied o ha povided by secion 8.. In paicula, he descipion of he appoaches fo calculaing age evenue do no mandae ha paicula iming assumpions be adoped, no peclude moe pecise modelling of he iming of wihin-yea cash flow. Moin, R, Regulaoy Finance: Uiliies Cos of Capial, (Public Uiliies Repos, Alingon, Viginia), 994, p. 83. The Allen Consuling Goup 3.

17 Chape 3 Tage Revenue Timing Assumpions As noed above, all of he fomulae ha may be used o calculae age evenues fo egulaoy puposes make implici assumpions abou he iming of evenue eceips and cash oulays wihin each yea. This chape discusses he wihin yea iming assumpions implied by he age evenue fomula included in he Commission s PTRM, as well as ha implied by ohe commonly-used (o poenial) fomulae. Obsevaions ae also made as o whehe hee ae any song a pioi easons fo expecing he diffeen fomulae o missae age evenue, and he likely diecion of ha bias. 3. PTRM Timing Assumpions Leaving aside he impac of inflaion and axaion, he fomula fo age evenue ha is efleced in he ACCC s PTRM is: 3 TR =. RAB, + Dep + O & M (5) open whee TR efes o he age evenue fo yea, is he oppouniy cos of capial, RAB,open is he value of he egulaoy asse base a he commencemen of yea (ie he opening value), Dep is he egulaoy depeciaion allowance (o eun of capial) fo yea, and O&M is he foecas of opeaing and mainenance coss fo yea. The fis elemen in his equaion. RAB is efeed o below as he eun on asses, open componen of age evenue, and he combinaion of he eun on asses and depeciaion elemens is efeed o as he capial-elaed componen o shae of age evenue. As shown in Appendix A, his paicula fomula makes he following assumpions abou he iming of cash flow wihin a paicula yea: he shae of evenue in espec of capial-elaed coss (ha is, boh he eun on asses and depeciaion elemens) is eceived a he end of he yea; capial expendiue is incued a he end of each yea; and he iming of he shae of evenue in espec of opeaing and mainenance coss is aligned wih he iming of hese coss. Clealy, hese assumpions ae unlikely o eflec a sevice povide s acual iming of cash flow. The diffeences ha may exis beween he assumed and acual iming, and he implicaions, include he following. Revenue would be expeced o be eceived ove he couse of each yea. Thus, he assumpion ha capial-elaed evenue is eceived a he end of he yea would undevalue he evenue eceived by he povide, poviding a bias in favou of he povide (all else consan). 3 Ausalian Compeiion and Consume Commission, Pos-Tax Revenue Handbook, Ocobe 00, p.. While i is noed ha he diffeen possible assumpions abou axaion may have a significan effec on age evenue (which jusifies a igoous assumpion abou axaion in ha conex), changing hese assumpions has lile effec on he iming of wihin yea cash flows. The Allen Consuling Goup 4.

18 Capial expendiue would also be expeced o be incued ove he couse of each yea. This, he assumpion ha his cash ouflow occus a he end of he yea would undesae he cos of poviding he egulaed sevices, poviding a bias agains he sevice povide (all else consan). The iming of evenue ove he peiod is unlikely o be aligned pecisely wih he iming of opeaing and mainenance aciviies. Depending upon he ne iming mismach, hee may be a bias fo o agains he povide (all else consan). Fo mos egulaed uiliies, as beween 60 and 70 pe cen of evenue eflecs he capial-elaed componens (and mos of which is he eun on asses componen), inuiion would sugges his age evenue fomula would be moe likely o ovesae (ahe han undesae) equied evenue. Howeve, whehe he combined impac of hese possible effecs is maeial, and he diecion of any maeial bias can be esimaed empiically, analysis of which is pesened in Chape Alenaive Tage Revenue Fomulae An alenaive commonly used fomula fo age evenue is o povide a eun on he aveage asse value ove he peiod (ahe han he opening value). Tha is: TR RAB, open + RAB, close =. + Dep + O & M (6) whee RAB,close is he value of he egulaoy asse base a he end of yea (ie he closing value), and he ohe vaiables ae as defined befoe. This fomula has been used by, amongs ohes, he Office of he Regulao-Geneal and he Queensland Compeiion Commission. As shown in Appendix A, his fomula is consisen wih he following assumpions abou he iming of cash flows wihin a yea: half of he annual depeciaion allowance is eceived, and half of he annual capial expendiue is undeaken, a he commencemen of he yea, wih he emainde eceived o spen a he end of he yea; he emainde of he capial-elaed componen of evenue is eceived a he end of he yea (which includes he shae of evenue aibuable o he eun on he asses in place a he sa of he yea); and he iming of he shae of evenue in espec of opeaing and mainenance expendiue is aligned wih he iming of hese coss. This fomula diffes fom he pevious one in ha i povides a eun equal o half of he cos of capial on he ne financing of capial expendiue he uiliy is expeced o undeake duing yea (ha is, half of he foecas capial expendiue less depeciaion). Similaly, if he uiliy is wihdawing funds fom he egulaoy asse base in any yea (ha is, depeciaion exceeds capial expendiue), half of he eun on his amoun is deduced. The inuiion behind poviding (o deducing) half of he nomal eun is ha he addiional capial would have been invesed fo appoximaely half of a yea if incued coninuously ove he yea. Thus, fomula (6) povides highe age evenue han fomula (5) if foecas capial expendiue exceeds depeciaion, and a lowe eun if foecas capial expendiue is lowe han depeciaion. The Allen Consuling Goup 5.

19 In pacice, howeve, capial expendiue and depeciaion ae likely o be easonably close (a leas ove a easonable peiod of ime), and so hee may no be a maeial diffeence beween he use of hese fomulae in pacice. In addiion, fomula (6) eains he implici assumpion ha he majoiy of he evenue aibuable o any yea is eceived a he end of ha yea and so he obsevaions abou he likely bias in fomula (5) apply equally. A hid alenaive assumpion abou he iming of wihin yea cash flow is ha capial-elaed evenue is eceived, and capial coss incued, a mid-poin of each yea (wih he shae of evenue aibuable o opeaing coss aligned wih he incidence of hese coss, as wih he pevious fomulae). I is undesood ha a numbe of UK egulaos have adoped his appoach when eviewing pice conols. This iming assumpion is appoximaely equivalen o assuming ha he capial-elaed shae of evenue is eceived, and capial expendiue is undeaken, a a consan ae ove any yea. Appendix A demonsaes ha he accual vesion of he age evenue fomula ha is consisen wih he mid-yea iming assumpion is as follows: TR =. RAB, open. + Dep. + Capex.( ) + O & M (7) ( + ) ( + ) ( + ) whee Capex is he foecas capial expendiue fo yea. Lasly, if i wee consideed ha assuming he capial-elaed shae of evenue is eceived, and capial expendiue is undeaken, coninuously (and a a consan ae) ove any yea, i is a saighfowad execise o deive he exac expession fo he age evenue fomula. In Appendix A i is shown ha he age evenue fomula consisen wih coninuous cash flows is as follows: ln( + ) ln( + ) ln( + ) TR =. RAB, open. + Dep. + Capex. + O & M (8) whee ln efes o a naual logaihm, and he ohe ems ae as defined above. 4 The diffeences beween he assumpions implied in he PTRM age evenue fomula and he assumpions implied by equaions (7) and (8) can be seen by noing ha hese equaions all can be expessed in ems of he following equaion: TR =. RAB,. CF + Dep. CF + Capex.( CF) + O & M (9) open whee CF is a coecion faco ha eflecs he paicula iming assumpion adoped. Fo he fomulae discussed above: () PTRM Fomula: CF = () Mid-Yea Cash Flows: CF = ( + ) 4 Noe ha he discoun ae,, in his fomula efes o he effecive annual discoun ae, and so is diecly compaable o he discoun aes included in he ohe fomulae. When discouning in coninuous ime, he applicable discoun ae is he coninuous ime discoun ae, which is elaed o he effecive annual ae hough he fomula: coninuous = ln( + effecive ). The Allen Consuling Goup 6.

20 (3) Coninuous Cash Flow: ln( + ) Fo he second and hid of hese fomulae, CF is geae han zeo bu less han one (noing ha because is an annual ae of eun, i will always be geae han zeo, bu less han ). Thus, when he mid-yea and coninuous fomulae ae compaed o he PTRM fomula, i is clea ha boh he eun on asses and depeciaion elemens ae discouned o eflec he fac ha his evenue is eceived ealie (and hence he evenue is moe valuable han assumed by he PTRM fomula). In conas, howeve, as capial expendiue is assumed o be undeaken ealie han by he PTRM fomula, he age evenue is inceased, eflecing he highe cos associaed wih he ealie financing commimen. I can also be demonsaed ha he coecion faco fo he coninuous cash flow assumpion is lage han he coecion faco fo mid-yea iming of cash-flows, implying ha eceiving evenue coninuously is moe valuable (and incuing coss is moe cosly) han eceiving evenue o incuing coss in he middle of he yea alhough he diffeence is vey small. 5 Wih espec o he possibiliy fo bias, as he las wo fomulae no longe assume ha he majoiy of evenue is eceived a he end of each yea, i is fa less likely ha hey would ceae a bias in favou of he egulaed eniy han would he use of fomula (5) o (6). Indeed, given ha egulaed uiliies end o eceive hei evenue wih a lag, o he exen ha hee is a bias, i may go agains he uiliy alhough hee ae no song a pioi gounds fo believing ha any such bias would be maeial. Again, whehe hee is a bias, and if so, is diecion and size, can only be deemined empiically. 5 Fo a discoun ae of 7 pe cen, he coecion faco fo he mid-poin cash flow fomula is , wheeas he coecion faco fo he coninuous ime fomula is he diffeence being immaeial. The Allen Consuling Goup 7.

21 Chape 4 Assessmen of Bias in Tage Revenue Fomulae In he pevious chapes, i has been noed ha whehe o no a paicula age evenue fomula may be biased given he acual iming of he cash flow o a egulaed eniy wihin a paicula yea, and he size of any such bias, may be esed empiically. This chape descibes how such a es may be pefomed, povides he esuls obained fo a eal wold example, ha being he Epic Enegy Moomba o Adelaide pipeline. 4. Ouline of he Appoach In Chape i was noed a pecise calculaion of he age evenue equiemen fo a paicula yea (yea ) could be found by finding R i, such ha: 6 RAV, open Ri, Ci, RAV = + i ( + ) ( + ) i=, close 365 (0) whee R i, and C i, ae he foecas of daily evenue and coss fo yea, RAV,open and RAV,close efe o egulaoy value of he asses a he opening and closing of yea, and is he daily discoun ae, which is given by: daily annual 365 ( + ) = () The (annual) age evenue fo yea would hen be given by he simple sum of he assumed daily evenue seam fo ha yea, ha is: = R i, i= TR () Given a se of assumpions abou how he eceip of evenue and paymen of expenses ae expeced o be spead ove he couse of he yea, he pecise age evenue consisen wih hose iming assumpions can be calculaed using equaions (0) and (). Compaing he pecise age evenue fo a es yea o he age evenues calculaed by he vaious fomulae will hen eveal whehe o no he simple fomulae ceae a maeial bias given he paicula assumpion abou he acual iming of evenue and coss, as well as he size of any bias. In addiion, by vaying he iming assumpions, he sensiiviy of he esuls o hose assumpions may be assessed, in un poviding a check on he eliabiliy of he esuls. A simila appoach may also be used o es whehe hee is a equiemen fo woking capial, fo a given se of iming assumpions. In paicula, he allowance equied in age evenue in espec of opeaing aciviies fo a yea can be calculaed by finding O M R & such ha: i, 6 While, in pinciple, smalle peiods han a day could be used, i is unlikely ha he eceip of evenue and paymen of expenses could be divided upon ino smalle peiods on any meaningful basis. The Allen Consuling Goup 8.

22 365+ O& M 365+ Ri, O& = i i= ( + ) i= ( + M ) i, i (3) The oal allowance equied in espec of opeaing aciviies which will eflec boh he cash spen, and he cos of financing opeaing aciviies is hen given by: O& M = i= O& M i, TR R (4) The financing cos associaed wih opeaing aciviies o allowance equied in espec of woking capial (WC_A) is jus he exen o which he equied allowance fo opeaing aciviies exceeds he foecas cos of opeaing aciviies, ha is: WC _ A O& M = TR O & M (5) The implied sock of woking capial, in un, is given by: WC _ A WC _ S = (6) whee is now he effecive annual discoun ae (as discussed above). As noed in Chape, howeve, he exisence of a posiive woking capial equiemen, of iself, does no imply ha i is appopiae o add an incemen o age evenue. Rahe, he appopiae quesion is whehe age evenue is adequae, having egad o iming of all evenue and expendiue. The Allen Consuling Goup has poduced a model ha undeakes such a calculaion, and has applied his model o he case of he Moomba o Adelaide pipeline. The nex secion descibes he fom of he inpus equied fo he model, and he basic algoihms pefomed, and he secion heeafe epos he esuls obained. 4. Empiical Tes of Timing Assumpions The basic sucue of he model is as follows. The financial infomaion fo he es yea is eneed, ha is, he opening egulaoy asse value, depeciaion allowance, assumed cos of capial and opeaing and capial expendiue foecass. The foecass of annual opeaing and capial expendiue ae boken down ino a seies of paymens houghou he yea, as deemined by he assumed iming of hese paymens. The fom of iming assumpions equied is discussed below. A seed value fo age evenue is assumed, which is hen boken down ino a seies of evenue eceips houghou he yea, as deemined by he assumed iming of hese eceips. The fom of iming assumpions equied is also discussed below. The seed value fo age evenue is ieaed (via a goal seek algoihm) unil equaions 0 and ae saisfied. The value fo age evenue ha esuls is he pecise age evenue coesponding o he iming assumpions. The same pocess is used o esimae he implied woking capial allowance, excep ha all capial elaed coss ae se o zeo. The Allen Consuling Goup 9.