WACC and CAPM According to Utilities Regulators: Confusions, Errors and Inconsistencies

19 Pages Posted: 11 Mar 2019 Last revised: 2 Jun 2019

See all articles by Pablo Fernandez

Pablo Fernandez

University of Navarra - IESE Business School

Date Written: February 19, 2019

Abstract

Regulators of many countries try to find the “true” WACC of Electricity, Gas, Water… activities. All their documents have in common a main confusion: they do not differentiate among expected, required, historical, and regulator allowed returns, which are 4 very different concepts. Most of the documents have several conceptual errors (they apply wrongly the CAPM and the WACC), several inconsistencies estimating parameters and multiply the WACC by the depreciated book value of assets.

Another two common peculiarities of many regulators are a) their penchant for calculating averages and averages of averages, and b) their argument of doing strange calculations “because many other regulators do so.” We show how a European Regulator arrives to a “WACC before taxes of the electricity regulated activities” of 5,58%. We also show that using the same data and the same method, but criteria of other regulators for the calculation of the parameters you may justify any “WACC before taxes” in the interval 2,4% - 7,4%.

After reading the mentioned documents of the regulators a question arises: Are they fiction or science fiction? We show some confusions, errors, inconsistencies and useless arguments of the documents of Regulators and propose solutions. Regulator reports (such as the one in Section 1) are very helpful to discover conceptual mistakes, valuation errors… and to think about the meaning of several concepts widely used in Corporate Finance and Financial Markets.

Keywords: Regulatory WACC; Regulatory CAPM; European Redulators; Errors; Confusion

JEL Classification: G12; G31; M21

Suggested Citation

Fernandez, Pablo, WACC and CAPM According to Utilities Regulators: Confusions, Errors and Inconsistencies (February 19, 2019). Available at SSRN: https://ssrn.com/abstract=3327206 or http://dx.doi.org/10.2139/ssrn.3327206

Pablo Fernandez (Contact Author)

University of Navarra - IESE Business School ( email )

Camino del Cerro del Aguila 3
28023 Madrid
Spain
+34 91 357 0809 (Phone)
+34 91 357 2913 (Fax)

HOME PAGE: http://web.iese.edu/PabloFernandez/

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