APPENDIX 4: ALTERNATIVE VIEWS ON RISK-FREE RATE AND ERP Alternative approaches to the risk-free rate The appropriate country risk-free rate in the context of the current (especially 2010 onwards) financial crisis in Europe is the topic of considerable debate. Some analysts have considered the spreads between a utility's CDS pricing and the country CDS as indicative of the perceived appropriate risk-free rate i.e. the risk-free rate could be adjusted downwards bv the spread. We replicate such analysis ¡n the chart below. The issue though is one of interpretation - in the case of EDP and Portuguese Government debt, there is such a spread and in recent times it is over 200bps, which might indicate that KDP is perceived as less risky than Government short-term debt. But care is needed, as other factors drive the analysis e.g. international diversification of LcommasuperiorDP earnings. Lcommasuperior n fortunately we have not found similar data for REN.
But nonetheless the data is illustrative and does point to a case that in times of extreme stress on Government debt, the appropriate risk-free rate for a national utility might be marginally lower.
Further evidence would be provided by the nominal yields on actual debt issuances by the utility.
Another alternative approach to estimating the risk-free rate is applying the Portuguese debt premium (measured by the CDS on Portuguese government bonds) to the Euro zone risk-free rate (the yield to maturity of the German bund). Even if we have not employed this approach, the figure below demonstrates that our estimádon yields practically the same results.
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