icon-water Advice on a regulatory rate of return for SA Water

  • Project Released: 06 Dec 2011
  • Project Closes: 22 Feb 2012
  • Contact: Nathan Petrus

Overview

The Essential Services Commission of South Australia (the Commission) has been asked to provide advice to the Treasurer on a regulatory rate of return to apply to SA Water.

The Commission’s advice, which has been sought by the Treasurer pursuant to section 5(f) of the Essential Services Commission Act 2002 (ESC Act), is to be based on a pre-tax weighted average cost of capital (WACC), with the cost of equity derived from the Capital Asset Pricing Model (CAPM).

Status

Current status is Final

  • Draft
  • Submissions  
  • Final

Final

The Commission has completed its final advice to the Treasurer regarding a regulatory rate of return to apply to SA Water.

The Commission wishes to emphasise that the regulatory rate of return can, and should, change over time to reflect prevailing market conditions and the most up-to-date information and practices. Thus, the regulatory rate of return to apply to SA Water from 1 July 2013 should be determined by a separate process immediately prior to that date.

The Commission released its draft advice on 6 December 2011 for a period of public consultation. Submissions were received from three stakeholders and were considered during the formation of this final advice.

As at 27 January 2012, the Commission's advice is summarised below:

Parameter Methodology Advice as at 
27 January 2012
Nominal risk-free rate 20 day average of 10-year CGBs 3.79%
Credit Rating Industry benchmark BBB
Gearing Industry benchmark 60%
Debt risk premium Extrapolated Bloomberg BBB 7-year FVC 3.94%
Equity Beta Industry benchmark 0.80
Market risk premium Best available evidence 6%
Corporate Tax rate Statutory tax rate 30%
Gamma Best available evidence 0.50
Post-tax nominal WACC Calculated from the above 7.38%
Pre-tax nominal WACC Calculated from the above 8.68%
Inflation forecast Derived from the 20-day average of 10-year CGB and inflation-indexed bonds 2.25%
Pre-tax real WACC Calculated from the above 6.29%