Critique of Report for the NMa on the Cost of Capital

22 December 2010
Dr. Richard Hern, Dominik Huebler, et al.

In February 2010, OXERA produced a report on the cost of capital applicable to Dutch energy networks on behalf of the NMa, the Dutch energy regulatory authority. At the request of Gas Transport Services (GTS), NERA was asked to review the methodology that OXERA used to calculate its range of estimates for the weighted average cost of capital (WACC).
In this report, a NERA team reviews the methodology used in OXERA’s report and present their findings. Overall, the authors find that OXERA's WACC report contains recommendations that are not consistent with good regulatory practice, and are likely to cause a downward bias in the cost of capital estimated for Dutch energy networks. The authors also find that some of these recommendations are not consistent with earlier reports by OXERA on the cost of capital. In addition, the authors identify a number of problems with OXERA’s methodology and calculate the range of estimates of the cost of capital that would emerge if these problems were rectified. 

The authors note that their review of OXERA’s reports indicates that GTS’s cost of capital lies at or above the upper end of the range that OXERA has provided. They note that the NMa instructed OXERA to update parameters “based on the methodology established in previous decisions.” Given that instruction, OXERA’s report does not represent an independent expert opinion and should not be treated as such.