Cost of capital and price controls
As a key tool in economic regulation, many members of the UKRN establish limits on the prices regulated companies may charge to ensure that customers’ bills, in respect of services provided, are maintained at an appropriate level.
Through economic regulation and specifically price controls, the interests of customers can be protected from the consequences of insufficiently developed competition. Participating regulators have signed up to the UKRN Cost of Capital Principles to ensure continued collaboration on cost of capital issues.
These principles are designed to ensure that UKRN members take an effective and efficient approach in setting the cost of capital in their own sectors, and in doing so, to minimise the risk to the cost of investing in the sector as a result of regulatory and political changes. It is not intended that these principles should cut across any regulators’ statutory duties, as they necessarily take precedence.
In setting the cost of capital in our sectors, UKRN members will follow these principles:
- Consistency – recognise the benefits of consistency and stability in our own and collective regulatory approaches – explaining why if a different approach is taken, and reflecting our own duties.
- Risk reflective – the reward will reflect the allocation of risk in the regulatory framework and sectors.
- Investment – Facilitate necessary investment in the infrastructure and services consumers want.
- Communication – Be clear and transparent in our communication with stakeholders.
- Good practice – Learn from each other’s approaches, those used in other jurisdictions and latest academic thinking.
- Evidence – Use market and other evidence to inform our work
- Review – Review these principles and our own approaches to the cost of capital at appropriate intervals.
We have also identified ways in which we intend to continue to collaborate in the future which are detailed in our Collaborative Working document, and which includes a Cost of Capital Terminology Buster.
Ofgem independent Beta Study
Ofgem has recently published an independent Beta Study conducted by a consultancy company (Indepen). The study explores approaches to calculating and using equity β and is of relevance to those interested in the UKRN’s cost of capital work programme.