WACC for Electric Power Transmission System Operators: The Case of Colombia

Abstract

In emerging countries, energy service users generally pay high rates of return to transmission system operators (TSOs). One of the causes of this situation is the application of the CAPM with the comparable beta method when estimating the cost of equity in the WACC. The purpose of this article is to present a new methodology for calculating the cost of equity of TSOs in Colombia. To achieve this objective, a multifactor model has been built to explain the variation in returns on the electric utilities portfolio in Colombia between April 2008 and March 2022 and then recalculate the WACC approved by the country’s regulatory commission. It was found that, in addition to the estimated market risk in the CAPM, there is a risk due to the regulatory framework and changes in interest rates, which helps to explain 73% of the variations in the electric utilities portfolio, resulting in a lower cost of equity, and therefore a lower WACC of 5.28% compared to the WACC estimated by the regulator of 11.79% in 2019. These results can support regulatory commissions in emerging countries in establishing a more accurate rate of return for users.