Conclusion
6.57 After asset base, WACC has the next most significant impact
on the calculation of excess returns. The Commission's approach to
determining WACC can be summarised as follows:
- WACC is computed using the tax-adjusted Brennan-Lally CAPM.
- The cost of debt is estimated for the same period as that used
to determine the risk-free rate (the period for which prices are
set) and not the duration of the airport's assets or its debt.
- The period of the risk-free rate should match the revision
frequency of pricing on the basis that landing charges should
reflect expected costs and risks over the period for which
prices are set, but not be affected by the expectations of rates
beyond that period. In determining the rate used, the
Commission's approach is to use an average yield on Government
stock over the period in which an airport consults with its
substantial customers (ending with the point at which any new
prices come into effect) and with a maturity matching the point
at which prices will again be reviewed (at maximum five years).
The rate also reflects compound interest.
- The Commission does not consider any of the various approaches
to estimating MRP to be better than any other. The Commission
adopts a tax-adjusted MRP of 8%, within a range of 7-9% in
recognition of uncertainty surrounding the estimate.
- The Commission uses a tax rate of 33% in computing the cost of
equity, but the statutory corporate tax rate (which in the late
1980s was 28%) in computing the after-tax cost of debt.
- In selecting comparators to determine beta, the Commission
considers a number of factors. In the case at hand, the
regulatory environment is fundamental to the performance of the
airports and is, therefore, the dominant factor considered in
choosing comparators. Benchmarks for an asset beta for airfield
activities are, therefore, United States firms engaged in
electricity generation and/or distribution that are subject to
rate-of-return regulation (which almost guarantees them a
certain rate of return), and electricity firms in the United
Kingdom subject to CPI-X price caps.
- A firm's actual leverage ratio - based on the market values of
debt and equity at the time prices are set - should be used
(consistent with the debt premium used).
- The Commission uses a nominal WACC in order to be consistent
with its approach to asset base and analysis of historical
returns. Any asset revaluations in the past and any expected
revaluation gains in the future are, therefore, included in
income.
6.58 Estimates of WACC for each airport based on the above
approach adopted by the Commission are determined in the separate
chapters on each airport.
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