Debt Capital for Estonian Regulated Undertakings

The aim of this empirical study was to define the actual costs and proportions for including debt capital in administratively regulated undertakings.  

The empirical study included regulated undertakings from the regulated sectors which can be categorised as small, medium and large undertakings in Estonia. Their actual costs and their proportions of debt capital were compared to the corresponding indicators defined in the regulatory WACC Manual.

Based on the results of the analysis outlined by the Estonian Competition Authority, it can be concluded that the arithmetic means of cost of the debt capital for the 111 regulated undertakings according to the indicators present in the annual reports of 2014 was 2.64%, which is lower by 1.69% than the average regulatory indicator (4.33%) outlined in the WACC Manual for 2014.

If the higher interest rates applied by the integrated parties are excluded, it can be concluded that in Estonia, the debt capital costs of small enterprises do not differ significantly from the debt capital costs of large enterprises.

Based on the results of the analysis outlined by the Estonian Competition Authority, it can be concluded that the arithmetic means of the proportions of debt capital for the 111 regulated undertakings was 33.95%, which is lower by 16.05% than the proportion of debt capital outlined in the WACC Manual (50%). Based on the results of this empirical study, it can be concluded that the sizes of the country risk premium and the debt risk premium, used in the WACC Manual, are sufficient. Because the resulting debt capital costs are generally (except for natural gas distribution network operators due to the high interest rates applied by integrated parties) higher when compared to the actual debt capital costs. However, the actual debt capital proportions are significantly lower when compared to the proportions used in the WACC Manual.

Acknowledged Paper of the 2017 ERRA Regulatory Research Award.