This research investigates whether the South African Energy Regulator (NERSA) correctly prices the cost of equity, through looking at the petroleum storage sector.
A model is built to simulate the current methodology for tariff setting and historical data is used to estimate the returns a regulated firm would have earned over the past 25 years. In addition, a benchmark cost of equity is calculated through a sample of US firms. Integrated firms are then decomposed to their revenue generating segments and cost of equity per segment is then estimated.
The study finds that the methodology calculates a return lower than that earned by the market (measured through the J203). The study further finds that the risk to which the regulated company is exposed to, defined in terms of variability of retunes, is not significantly different than that of the market. Lastly, the study finds that the benchmark cost of equity is significantly higher than that calculated by the Regulator.
Recommendation for Regulator consideration as well as for further research are provided.