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Rate of return guideline

Explore the importance of clarity and stability in future policy for monopolies in regulatory environments. Discuss the risks of underinvestment and the need for a balanced rate of return. Learn about stakeholder contributions, regulatory principles, and the role of WACC parameters in decision-making.

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Rate of return guideline

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  1. Rate of return guideline David Markham 18 September 2017

  2. The rate of return These are monopolies. Customers rely on regulation by the AER, rather than through competition, to get the service they require at an efficient price. Clarity and stability in future policy in these areas is essential. If this is not forthcoming, investment decisions may be delayed, and business confidence undermined. Finding ways for stakeholders (other than the regulator and the regulated) to provide a meaningful contribution to determinations.

  3. Balancing the risk in theory & practice The rate of return must strike the right balance between the risks involved, including the considerable risks associated with underinvestment in the network. Flexibility should be seen as an inferior regulatory principle to consistency, and also to predictability. Signalling the approach that will be taken in the future is a key part of good regulatory practice. The concentration of resources and scrutiny around a single binding RoRcan decrease the likelihood of WACC parameters being too generous.

  4. APPROACH to rate of return The extant WACC parameters can all be incorporated in the rate of return guideline. More weight should be given to contemporary market evidence over long term averages. Any concerns that minor miscalculations in WACC can translate to major increases in revenue is no better or worse addressed in the binding RoRproposal than current arrangements. Considering that pass-through costs include carbon, regulatory change, service standard events, tax change, terrorism, insurer credit risk, insurance cap, natural disasters and so on; end users are still bearing the risk. Broadening the scope to financial parameters like inflation may actually help minimise the tendency for either regulator or the regulated to seek ‘decisions’ that keep their options open. This may be a clear benefit.

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