Calculating the cost of capital for the regulated electricity distribution companies

The ´cost of capital´ is an important figure for the UK´s regulated industries: in part it determines billions of pounds of customer bills, investor returns and stock market value. This article reviews and applies finance theory to arrive at a current range for the DNOs´ cost of capital. The midpoint of the resultant range, 7/spl middot/5%, is significantly higher than the 6/spl middot/5% currently set by OFGEM, which implies that the DNOs are not being allowed to make sufficient returns to compensate their investors for the risks associated with an electricity distribution business. A review of recent UK regulatory determinations of the cost of capital shows unnecessary risk in the regulatory process; this article calls for investment in a common, less subjective UK regulatory approach to calculating the cost of capital.