The weighted average cost of capital (WACC) is a key input for calculating the revenue requirements and setting prices for many of the businesses we regulate. The WACC is the weighted average of debt and equity costs required for a benchmark efficient business to invest in necessary infrastructure.
If we set the WACC too high, customers would pay too much and the regulated business could be encouraged to over-invest. If we set it too low, the business’ financial viability could suffer, and it may under-invest. Neither outcome is in the long-term interest of customers.
We use a standard method to determine the WACC in our pricing reviews – the 2018 WACC method.
In addition, we publish a number of tools and information sources to assist stakeholders in replicating our WACC decisions. These include:
- Our WACC model spreadsheet
- A bi-annual update of market data used to calculate WACC in February and August of each year.
- Our latest short-term market risk premium (MRP) estimates.
- Monthly time series of individual MRP estimates.
- Our Uncertainty Index mode
- Our True-up calculator
We are currently consulting on using an alternative source of data in the estimation of the debt margin. Please see our fact sheet and slide pack that details our approach.