The Electricity and Cogeneration Regulatory Authority (ECRA) needed to update the Weighted Average Cost of Capital (WACC) for the Saudi Electricity Company (SEC) and its constituent businesses of generation, transmission and distribution. The WACC is a key input to ECRA’s tariff determination process for SEC so needs to be revisited on a regular basis. Also the potential restructuring and privatisation of the electricity sector added additional impetus. It was important that the WACC reflected both changes to the nature of its business and the financial markets with which it engages. ECRA wanted IPA to advise on the appropriate WACC to ensure industry would be incentivised to ensure efficient investment in its assets while protecting consumer prices.
IPA undertook a high level review of existing methodologies for calculating the WACC across SEC's constituent businesses and examined international best practice. By taking account of the vertically integrated nature of the Kingdom’s power market, IPA developed recommendations for potential changes to enhance the methodology for calculating SEC's WACC.
This work was summarised in a Report for key industry stakeholders, enabling ECRA to consult on and agree the most appropriate methodology for the calculations. IPA then supported ECRA during its negotiations with SEC over the final value for the WACC. IPA also advised ECRA on different approaches to utilising WACC to support price control reviews which were consistent with regulatory best practice as ECRA prepares to take further steps towards market liberalisation.
IPA provided training and support to enhance ECRA’s understanding of the calculation of the WACC and to build its capacity to undertake the calculation independently in the future. This involved preparing and presenting a one week course on the purpose of the WACC and different approaches to its calculation, and included practical exercises in the application of the theory to SEC specifically.