Where in a range should the weighted average cost of capital (WACC) be set? In New Zealand, the Commerce Commission is required to set formal rules for the choice of WACC over time. Based on an assessment that the risks of setting the WACC too high were greater than the risks of setting it too low, the Commerce Commission chose to allow a WACC premium representing a point from above the middle of its range (the ‘75th percentile’).
Following a Court decision resulting from a legal challenge, the Commerce Commission is seeking analysis on whether its approach is consistent with the evidence of the scale of risks arising from the choice of WACC. Having reviewed the evidence, Oxera has concluded that there is evidence that a premium would be appropriate. For electricity, our report presents a range of evidence, and proposes options for the Commerce Commission to use in its response to the Court’s decision.