The NSW government is expected to receive lower than anticipated bids for the sale and leaseback of the Kurnell desalination plant following a decision by the pricing regulator to slash its prospective returns.
Sydney Water sought a higher return from the asset of 7.8 per cent for the weighted cost of capital, which is the assumed interest rate that would apply to the owner of the asset when borrowing money. The Independent Pricing and Regulatory Tribunal cut this to 6.7 per cent, which it conceded was still generous.
This lower figure, which will reduce the revenue of the plant by as much as $95 million over the five-year determination period, is likely to be cut further in future determinations.
In a surprise ruling released yesterday, the tribunal admitted the figure for the weighted cost of capital was set substantially above the assessed mid-point of the likely range of 5.9 per cent due to ”market uncertainty”, referring to the present instability of financial markets.
It also agreed to set the weighted average cost of capital at a pre-tax level, and not post-tax, which it plans to introduce with all other determinations. This will boost revenue over the five-year determination period by $102.1 million, effectively offsetting the lower than anticipated weighted average cost of capital.
The state government may want to extend the lease period for the plant beyond its original intentions, although its flexibility may be limited by accounting standards.
