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The cost of equity capital in a regulatory environment: an international comparison
South Africa's electricity tariff determinations have been a matter of much public debate. This has been highlighted in popular media in South Africa, with above inflation increases in electricity tariffs allowed by the National Energy Regulator of South Africa (NERSA) in Multi-Year Price Determinat...
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| Format: | Thesis |
| Language: | English |
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Department of Finance and Tax
2015
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| _version_ | 1867613258838441984 |
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| access_status_str | Open Access |
| author | Graham, Kyle Stephen |
| author2 | Correia, Carlos |
| author_browse | Correia, Carlos Graham, Kyle Stephen |
| author_facet | Correia, Carlos Graham, Kyle Stephen |
| author_sort | Graham, Kyle Stephen |
| collection | Thesis |
| description | South Africa's electricity tariff determinations have been a matter of much public debate. This has been highlighted in popular media in South Africa, with above inflation increases in electricity tariffs allowed by the National Energy Regulator of South Africa (NERSA) in Multi-Year Price Determination (MYPD) 2 and MYPD 3. However these increases are below those applied for by Eskom. Estimating the cost of equity capital is a key element of the tariff determination process. This study therefore aims to evaluate the cost of equity methodologies used by regulators, and to assess whether NERSA's (South Africa) methodology is in line with international best practice. This study analysed the published cost of equity methodologies of 14 electricity regulators operating within developed and developing economies. A review of academic literature indicates that the Capital Asset Pricing Model (CAPM) understates the returns of low beta stocks, such as utilities. Furthermore, the Fama and French Three Factor model (FF3F) has been shown to have better explanatory power and results in higher estimates of the cost of equity. In spite of these empirical findings, this study found a preference for the CAPM among regulators, with no regulators using the FF3F model. The CAPM is selected due to its widespread use and the fact that it is simple to implement. This finding indicates that regulators are systemically under-compensating utilities for the risk undertaken. NERSA's (South Africa) cost of equity methodology was found to be in line with regulatory methodology, although its lack of consideration of alternatives and its relative lack of disclosure into the estimation does result in less transparency and potentially less reliable estimates of the cost of equity. Until a definitive answer has been reached, it is likely that the CAPM will continue to be used in a regulatory environment. |
| format | Thesis |
| id | oai:open.uct.ac.za:11427/15473 |
| institution | University of Cape Town (South Africa) |
| language | eng |
| last_indexed | 2026-06-10T12:33:17.409Z |
| license_str | Not specified — see source repository |
| provenance_str_mv | Harvested via OAI-PMH from UCTD — University of Cape Town Open Access Repository |
| publishDate | 2015 |
| publishDateRange | 2015 |
| publishDateSort | 2015 |
| publisher | Department of Finance and Tax |
| publisherStr | Department of Finance and Tax |
| record_format | dspace |
| source_str | UCTD — University of Cape Town Open Access Repository |
| spelling | oai:open.uct.ac.za:11427/15473 The cost of equity capital in a regulatory environment: an international comparison Graham, Kyle Stephen Correia, Carlos Financial Management South Africa's electricity tariff determinations have been a matter of much public debate. This has been highlighted in popular media in South Africa, with above inflation increases in electricity tariffs allowed by the National Energy Regulator of South Africa (NERSA) in Multi-Year Price Determination (MYPD) 2 and MYPD 3. However these increases are below those applied for by Eskom. Estimating the cost of equity capital is a key element of the tariff determination process. This study therefore aims to evaluate the cost of equity methodologies used by regulators, and to assess whether NERSA's (South Africa) methodology is in line with international best practice. This study analysed the published cost of equity methodologies of 14 electricity regulators operating within developed and developing economies. A review of academic literature indicates that the Capital Asset Pricing Model (CAPM) understates the returns of low beta stocks, such as utilities. Furthermore, the Fama and French Three Factor model (FF3F) has been shown to have better explanatory power and results in higher estimates of the cost of equity. In spite of these empirical findings, this study found a preference for the CAPM among regulators, with no regulators using the FF3F model. The CAPM is selected due to its widespread use and the fact that it is simple to implement. This finding indicates that regulators are systemically under-compensating utilities for the risk undertaken. NERSA's (South Africa) cost of equity methodology was found to be in line with regulatory methodology, although its lack of consideration of alternatives and its relative lack of disclosure into the estimation does result in less transparency and potentially less reliable estimates of the cost of equity. Until a definitive answer has been reached, it is likely that the CAPM will continue to be used in a regulatory environment. 2015-11-30T13:16:02Z 2015-11-30T13:16:02Z 2015 Master Thesis Masters MCom http://hdl.handle.net/11427/15473 eng application/pdf Department of Finance and Tax Faculty of Commerce University of Cape Town |
| spellingShingle | Financial Management Graham, Kyle Stephen The cost of equity capital in a regulatory environment: an international comparison |
| thesis_degree_str | Master's |
| title | The cost of equity capital in a regulatory environment: an international comparison |
| title_full | The cost of equity capital in a regulatory environment: an international comparison |
| title_fullStr | The cost of equity capital in a regulatory environment: an international comparison |
| title_full_unstemmed | The cost of equity capital in a regulatory environment: an international comparison |
| title_short | The cost of equity capital in a regulatory environment: an international comparison |
| title_sort | cost of equity capital in a regulatory environment an international comparison |
| topic | Financial Management |
| url | http://hdl.handle.net/11427/15473 |
| work_keys_str_mv | AT grahamkylestephen thecostofequitycapitalinaregulatoryenvironmentaninternationalcomparison AT grahamkylestephen costofequitycapitalinaregulatoryenvironmentaninternationalcomparison |