4,4. Tax We use the headline tax rate to compute a pre-tax cost of equity and thus a pre-tax WACC (cost of debt data is already pre-tax). We are advised that both the corporation tax rate and the municipal tax rate were applied to profits and as such use a combined (and by definiuon higher) rate to gross up the cost of equity.
4.5. The WACC This section presents our conclusions for the overall WACC. We also present further detail on how our estimates change over time, as well as an ¡Lustration of the relevant parameters for a specific scenario (the medium term base case). Note that the yearly data points arc the outputs of our modelling, and should not necessarily be interpreted as individual point estimates.
It is based on the ranges shown above for each of the building blocks. Our estimates cover each year from 2000 to 2010, but the table below focuses on the appropriate comparator cost of capital at the time of the CMEC agreements in 2007. More detailed tables showing the detailed figures and building blocks that underpin each of the scenarios are available in Appendix 3, along with sensitivity and robustness checks.
Our estimates in Tabic 4.2 below are specific to a point in time (i.e. year) and rime horizon (i.e.
remaining asset life - short, medium or long). To capture the latter we adjust the time horizon used for our evidence on the risk-free rate and the debt premium. We do not consider we have evidence to justify calculating a rate that is specific to the technology concerned. In our view these rates are likely to have been very similar. We acknowledge that a range of plausible values exist. As well as our base case, we present low and high estimates based on alternative assumptions for gearing and beta.
We are aware that the Ministry is particularly interested in the results of our analytical work for the year when the CMEC regime came into operation (2007). Our focus has been on estimating the returns that would have been required by private investors at the rime. An important cross check for this is the viewpoint of regulators: typically, WACCs are set by regulators or within contracts based on a view of the recent past and likely changes to rates over the period, i.e. a fixed allowed return is informed by past events and the regulator's expectations of any changes in market conditions, plus the need to ensure that the company can tina n ce itself over the period.
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