ROSEAU, Dominica- August 27, 2024: Stakeholders reached a consensus as responses were provided to the consultation questions during a face-to-face public meeting held by the Independent Regulatory Commission (IRC), regarding Dominica Electricity Services Ltd.
(DOMLEC) Weighted Average Cost of Capital (WACC), as part of the ongoing tariff review process.
The Commission and DOMLEC presented their proposals on a suitable WACC for DOMLEC, on August 14, 2024, at the Public Service Union Building. WACC helps determine the rate of return that investors expect from their investments in funding the utility company’s operations.
The Commission’s objective is to evaluate and determine the WACC that will be used for DOMLEC’s regulatory rate base when setting tariffs for the three-year tariff period. Debt and equity are key elements in the utility company’s capital structure, and as such they must be factored in the calculation of DOMLEC’s WACC.
IRC found that DOMLEC’s capital structure as of its 2022 Balance Sheet, includes equity of 54.4 percent, for EC$90.7 million, and debt of 46.6 percent of EC$79 million. Data from comparable electric utility companies in the region was used to arrive at the proposals on the WACC. The Commission believes that investors in DOMLEC should expect a fair cost of equity, which includes a post-tax WACC of 7.90% and a pre-tax WACC of 9.82% for DOMLEC’s regulatory asset base.
The following consultation questions were posed to stakeholders at IRC’s consultation:
1. Do respondents have any view regarding whether the proposed capital structure for DOMLEC should be set at 46.6% debt and 53.4% equity? If not, please explain why not.
2. Do respondents agree to use as the cost of debt the proposed interest rate of 5% based on DOMLEC’s long-term debt? If not, please explain.
3. Do respondents have any views on the proposed use of the U.S 10-year Treasury Bond as of July 2023 of 3.75% as the basis for fixing the risk-free rate for DOMLEC? If not, please explain.
4. Do respondents agree to use the Commission-proposed 30 US Power Utilities as the proxy utilities proposed by IRC or the 15 U.S. Power Utilities recommended by DOMLEC? Please provide reasons.
5. Do respondents agree that the small company size be excluded in the computation of cost of equity for DOMLEC but rather the country risk premium of 3.08% be factored in the calculation as well as equity risk premium of 5.06% be factored in the calculation, instead of 8.27%?
6. Do respondents agree with the Commission’s proposed Beta of 0.44 for all U.S Power Utilities to be used as proxy beta value for DOMLEC? Please provide reasons.
7. Do respondents agree to use the Commission’s proposed WACC post-tax of 7.90% and WACC pre-tax of 9.82%? Please provide reasons.
Stakeholders in attendance agreed with IRC’s proposals, after seeking clarity on their concerns. IRC’s comments on stakeholders’ first responses and publication of the second issue of the consultation document will be on August 30th, 2024.
The Commission will respond to any related questions as well as consider any comments to arrive at its final decision. The period for this will close on September 13, 2024. The Commission’s final decision on DOMLEC’s WACC will be issued on September 27, 2024.
The consultation document can be accessed on our website at this link Consultative – Independent Regulatory Commission (ircdominica.org)