The New South Wales Independent Pricing and Regulatory Tribunal (IPART) published today a draft decision on its 2018 review of its approach to conducting financeability tests. Financeability tests are used by some regulators in the UK, and in Australia by IPART and the Victorian Essential Services Commission, to check that businesses are likely able to maintain, over the next regulatory period, an investment grade credit rating under the revenue allowances provided by the regulator’s pricing decisions.

If a pricing decision provides a regulated business with insufficient cash flow to meet its debt obligations, its creditworthiness could deteriorate, and the price it must pay to attract new finance (or to roll over existing finance) may increase. These higher costs would either flow through to consumers, or result in the business being unable to attract the funds it needs to invest in the assets required to deliver services to consumers. Financeability tests are therefore an important tool to ensure that a regulator’s decisions do not inadvertently place regulated businesses under financial strain, the consequences of which may be borne by consumers over the long-term.

IPART has concluded provisionally that its financeability tests are working well. However, IPART has proposed a number of changes that it considers would improve the effectiveness of its tests.

Frontier Economics is advising the Sydney Desalination Plant through IPART’s review of its financeability tests.

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