The Government of South Australia is proposing to introduce significant regulatory reforms to the water industry in this State. The reforms are set out in the Water Industry Bill, which is currently before the State Parliament. As part of the proposed reforms, the Essential Services Commission of South Australia (the Commission) is to be appointed as the independent economic regulator of the water industry. One of the Commission's major functions under the Water Industry Bill will be the regulation of the State-owned vertically integrated water provider in South Australia, SA Water.
A key component of the Commission's first price review will be the setting of a regulatory rate of return for SA Water. The regulatory rate of return (also referred to as the “cost of capital”) is a key input into the cost “building blocks” of a regulated business. It is a measure of the opportunity cost of investment in regulated assets, and is integral in ensuring that there is sufficient incentive for ongoing investment in relevant infrastructure.
The Commission would have undertaken a review of the regulatory rate of return during the price review, however, the South Australian Treasurer has requested that the review be brought forward to assist in the development of a pricing order for the initial period of the independent price regulation of the South Australian water industry.
The Commission's Draft Advice on a regulatory rate of return is summarised below:
|
Parameter |
Draft Advice |
|
Nominal risk-free rate |
4.38% |
|
Credit Rating |
BBB |
|
Gearing |
60% |
|
Debt risk premium |
3.80% |
|
Equity Beta |
0.80 |
|
Market risk premium |
6% |
|
Corporate Tax rate |
30% |
|
Gamma |
0.50 |
|
Post-tax nominal WACC |
7.85% |
|
Pre-tax nominal WACC |
9.23% |
|
Inflation forecast |
2.20% |
|
Pre-tax real WACC |
6.88% |
The Commission is seeking comments from interested parties regarding the issues presented in this Draft Advice. Submissions from interested parties will be taken into consideration during the formation of the Commission's Final Advice to the Treasurer.
The Commission asks that submissions are provided by 6 January 2012.
Publications
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% |
Publications
