The Cost of Equity of Network Operators – Empirical Evidence and Regulatory Practice

Abstract

In many European countries, the deregulation of energy markets made the task of setting an adequate cost of equity more difficult. The question arises, how regulators set equity returns for network operators and whether the methodologies applied are in line with state-of-the-art capital market models. Based on an analysis of empirical results published and an own data set of more than 20 network operators, we show that most regulatory agencies do not set interest rates in an optimal way. Firstly, they either include companies with other systematic risk (e.g. integrated utilities) in their datasets. Secondly, they rely solely on CAPM even if the use of a size factor can potentially increase quality of results. The article concludes by providing a suggestion on how to put the FF TFM into practice accounting for the size of non-stock listed network operators.

Keywords

asset pricing models cost of capital cost of equity network operator regulation

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