January Cost of Capital for PR09 A Final Report for Water UK

Size: px
Start display at page:

Download "January Cost of Capital for PR09 A Final Report for Water UK"

Transcription

1 January 2009 Cost of Capital for PR09 A Final Report for Water UK

2 Project Team Dr Richard Hern Tomas Haug Anthony Legg Mark Robinson Contact Dr Richard Hern Ph: +44 (0) Fax: +44 (0) Stratford Place London W1C 1BE United Kingdom Tel: Fax:

3 Executive Summary In November 2009 Ofwat will set limits on the prices that water and sewerage companies in England and Wales can charge their customers during the five year period An important component of this review is the cost of capital. At PR04 Ofwat s approach to estimating the cost of capital relied on a range of evidence including the traditional CAPM, supplemented by dividend growth models, market to asset ratios and evidence from transactions involving water companies. In March 2008 Ofwat released Setting Price Limits for : Framework and Approach ( SPL ), which indicated that its methodology for PR09 was likely to be quite similar to the approach at PR04. NERA prepared a cost of capital report for Water UK in June 2008 (henceforth referred to as the June report) 1 that was based on data up to the end of March In that report we calculated a range for the post-tax WACC of %. Since March 2008, conditions in the world s financial markets have deteriorated significantly and there is evidence that this has led to a re-pricing of risk in both the debt and equity markets. The financial turmoil has resulted in significant changes to cost of capital data, some of which may be short-term and some of which may be more structural. In this report we update our June report taking into account data up to the end of November Our revised post-tax cost of capital range is %. The increase in our cost of capital range is mainly due to a higher forward-looking cost of debt estimate than in the June report. We also revise upwards our ERP range to take account of the latest forward-looking data. Due to the recent volatile nature of international capital markets we recommend that this cost of capital range will need to be reconsidered closer to PR09 Price Determinations. Updated data during 2009 will assist in determining the likely long run impacts of the current financial crisis. We have not concluded on a point estimate of the cost of capital at this stage. In this report we have not considered the impact of the potential introduction of competition into the E & W water industry upon the cost of capital. We note, however, that investors perception of the potential opening of the market to competition will increase the cost of capital and will likely reduce the availability of funds. Cost of Equity We have relied primarily on evidence from the CAPM, taking into account that this is the model that Ofwat will likely rely on most heavily in its assessment of the cost of capital at PR09. We note that the Competition Commission has also recently concluded in the BAA airports quinquennial reviews that the CAPM remains the preferred tool for estimating the cost of equity NERA (2008) Cost of Capital for PR09, Final Report for Water UK. See Competition Commission (2008) Stansted airport Ltd: Q5 Price Control Review, 23 October, p92 and Competition Commission (2007) BAA Ltd - A report on the economic regulation of the London airports companies (Heathrow airport Ltd and Gatwick airport Ltd), 28 September 2007, p53. i

4 Although we place primary consideration on the CAPM, we recognise that standard approaches for estimating CAPM parameters use historical data, and therefore may not capture the full impact of changes in capital market conditions on the forward-looking equity returns that investors require. This is a particular concern with respect to the equity risk premium (ERP) given the current volatility in world capital markets. We deal with this issue in a number of ways in the report: First, we have cross-checked historical data on the ERP with forward-looking data on expected market returns for the stock market as a whole. The latest market evidence leads us to increase our central estimate of the ERP by comparison to our June 2008 report. Second, we have cross-checked the results from the CAPM with other market evidence. In particular, we have used evidence from forward-looking Dividend Growth Models (DGM) for the water sector. We find that cost of equity estimates based on the DGM are broadly consistent with our CAPM results. Taking into account all the available evidence, our analysis shows that the real post tax cost of equity for the E & W water sector is in a range of % using the CAPM based on a 60% gearing assumption. Estimating a DGM using 2008 data produces an average real cost of equity range for the industry of %. The lower end of this range is based on the assumption that dividend growth rates are equal to historic dividend growth and slightly less than long-term projected GDP growth. The upper-end of the range is based on a projected long-term growth trend equal to analysts forecast of near term growth. We note that DGM results for the individual companies lie within a wider range of %. However, since this report is concerned with the determination of an average industry wide cost of capital, we consider that this is best estimated using a central range reflecting the average DGM results. Averages across the four listed companies will also be less affected by market volatility or statistical error which might have affected any one company s estimates. To conclude on the overall real cost of equity, we use both CAPM and DGM. This provides additional comfort that our final recommendation on the industry wide cost of equity is not outside a reasonable range, which has particular merit during the current period of heightened market volatility. We conclude on the overlap of CAPM and DGM-derived cost of equity, which we consider an objective method to narrow down the possible range. This method produces a central range for the cost of equity of %. The results are shown in Table 1 below. ii

5 Table 1 Cost of Equity for PR09 (%) CAPM DGM Real Risk-free Rate 2.5 Equity Risk Premium 5.4 Gearing Asset Beta Equity Beta Cost of Equity (real, post-tax) Overlap Range Source: NERA analysis The CAPM parameters shown in Table 1 above are derived as follows: Risk Free Rate In this report we show that all recent data on the UK risk-free rate is volatile and there is no perfect measure of the risk-free rate. Volatility in risk free rate measures has been especially marked since September 2008 following the collapse of major financial institutions, concern about deflation and uncertainty about the size of planned increased government borrowings. All of these factors have led to large swings in yields on securities such as gilts, government bonds and swaps that are used to measure the risk free rate. Due to the volatility in risk free rate measures post September 2008, we have attached little weight to risk free rate data during this period in deriving a cost of capital estimate for use at PR09. However, longer term trends in the risk free rate may become more apparent during the course of 2009 if financial markets stabilise. We have considered evidence from four different approaches to estimating the real risk-free rate: inflation-protected government bonds, deflated UK nominal government bonds, deflated international government bonds and deflated swap rates adjusted for inter-bank risk. All four approaches are theoretically appropriate methods for estimating the real risk-free rate. In summary, our analysis shows the following: Inflation Linked Gilt (ILG) yields are a biased measure of the risk-free rate, especially for long-dated maturities, and have been for around the last 10 years. A major cause of this is inelastic demand by pension funds for inflation-protected bonds, due to changes in the regulatory and accounting framework which encourage the holding of these types of assets (such as FRS19 and IAS17). UK nominal gilts are more liquid than the IL market, and demand for these assets is less affected by financial regulations. However, UK nominal bond yields are highly volatile and there is some evidence that there has recently been a bubble in UK nominal bond prices due to large numbers of investors chasing limited supply. This may change during 2009 if more nominal debt is issued to finance the fiscal stimulus. Evidence that UK nominal bonds yields are not a perfect proxy for the UK risk free rate is confirmed by a comparison between UK nominal yields and international iii

6 government bond yields. When all yields are deflated for expected inflation, the UK yields lie markedly below international bond yields. Moreover the UK yield curve is highly inverted whereas other bond yield curves such as the US and Germany are upward sloping (as theory predicts). International evidence on deflated nominal bond yields shows a risk free rate of %. Many recent papers in the finance literature show that the risk-free rate is better proxied by the swap rate than government bond rates for all maturities. This is because the swap market is a much more liquid market than the government bond market and swap rates are not distorted by financial regulations that impact on demand for government bonds. Swap rates, however, do include an inter-bank lending risk premium that should not be included in a measure of the risk-free rate. After adjusting for this premium estimates of the risk-free rate using a swap based approach average around 2.5% over the past ten years, and the 3-month estimate up to September 2008 is also 2.5%. Taking into account the evidence from all four approaches, our estimate of the real risk free rate to be used in the CAPM is 2.5%. This estimate places most weight on time series data on UK swap rates up to September However, we have cross checked this estimate with international data on government bond yields which shows a range of 2.2%-2.8%. We attach little weight to UK ILG yields and UK nominal bond yields in our conclusions due to liquidity concerns with these securities expressed above. We note that the Competition Commission still prefer to rely on risk-free rate measures using Index Linked Gilts (ILG), despite noting that yields on longer-dated yields are biased downwards due to pension fund demands driven by accounting regulations such as FRS17 and IAS19. 3 Using this methodology, the Competition Commission recently estimated a risk-free rate of 2.0% in the Stansted airport review based on data up to 12 September. However, if the CC s methodology was repeated using the very latest data up to November 2008, it would lead to a higher conclusion. Yields on UK ILGs have increased dramatically since the CC s Stansted recommendation. The 3-month historical average of 5-year yields was 2.6% at the end of November, compared with 1.6% as cited in Stansted (as at 12 September). The spot rate on a 5-year ILG was as high as 4.2% at the end of November (its highest level since 1992). This update shows that ILG data are highly volatile and strong conclusions should not be drawn on the regulatory risk-free rate based on this data alone. Notwithstanding this, the recent rise in ILG yields is supportive of our overall conclusion on a central risk-free rate of 2.5%. 3 The effect of these distortions is to depress observed yields on the affected range of bonds below the true risk free rate by the amount that pension funds are willing to pay to meet their legal obligations. For this reason, UK ILGs do not provide an accurate measure of the real risk free rate for estimating the cost of capital. A number of academics have noted these problems. For example, Stephen Schaefer (2008), Finance Professor at the LBS, stated in a recent submission to the BAA airports inquiry: If the yields on Treasury bonds are lower than swap rates primarily because Treasuries provide liquidity benefits then, on the (reasonable) assumption that equities do not themselves provide the same liquidity benefits as Treasuries, the swap rate may be a better measure of the risk-free rate than the Treasury rate when applying the CAPM to estimate the required return on equity. iv

7 In reaching our conclusion on a risk-free rate of 2.5%, we also note that Ofwat s range for the risk-free rate at PR04 was %, and that previous UK regulatory estimates of the risk-free rate generally lie in the range of 2.25%-2.75%. Regulators should be mindful of the need for regulatory consistency. Given the volatility in international capital markets relying too heavily on very short term data on imperfect proxies for a riskless security, as the Competition Commission has done in the Stansted review, injects an unnecessary degree of regulatory risk into the price control process. There is no substantial body of evidence to justify the Competition Commission s significant departure in the Stansted review from previous regulatory decisions on the risk-free rate. Equity Risk Premium In our June report we presented the ERP as a range of %, based on geometric and arithmetic averages of long run historical equity returns. As noted in our June report and confirmed by further analysis subsequently the geometric average has very little support amongst the academic community as the correct measure of the ERP for UK regulatory purposes. 4 The single statistic that is favoured by the vast majority of finance academics is the arithmetic average of historical returns which estimates the ERP at 5.4% for the UK. The reason why the arithmetic mean is the preferred measure of the ERP is because it represents the mean of all the returns that may possibly occur over the investment holding period. The arithmetic mean, therefore, explicitly accounts for the volatility of equity market growth. In contrast, the geometric average assumes that growth is constant and perfectly predictable. This is clearly an unrealistic assumption. One concern with the use of long-run historical data on the ERP for regulation is if prospective capital market conditions over the regulatory period are unrepresentative of normal economic conditions. If this is the case, then some adjustment to the historical data may be warranted. We have therefore cross-checked historical data on the ERP against the latest forward-looking data on expected market returns for the stock market as a whole. Real cost of equity estimates are obtained by applying a DGM to the FTSE 100. Over the course of 2008, the results show ERP estimates of 5-7% for 2008 based on a range of plausible long-term growth assumptions. These results are, therefore, broadly consistent with long run arithmetic (but not geometric) averages of historical returns. However, the analysis also shows that there is a strong increasing trend in the ERP estimate in recent months, which reflects the increased volatility and financial uncertainty that have led investors to demand greater compensation for risk. 5 We note that our estimate of the ERP of 5.4% lies outside the CC s ERP range for Stansted of 3-5%. In this report we describe a number of reasons why the CC s range is too low that include selective interpretation of evidence and flaws in the application of the 4 5 For instance, even the most prestigious former advocates of the geometric mean (Copeland et al (1990) p196) now state that the arithmetic average is the best estimate of future expected returns (Copeland et al (2000) p219). This effect has recently been noted by (among others) the Bank of England, which suggested that volatility was the reason for a rise in their DGM based ERP estimates. Bank of England (2008), Quarterly Bulletin, Q1, p8. v

8 DGM. The CC s range is also inconsistent with current forward-looking evidence on the ERP. In light of recent increased stock market volatility and uncertainty, which may prevail throughout the next price review, we believe it would be highly inappropriate for Ofwat to adopt the CC s ERP range, which is an outlier even in times of more normal market conditions. Asset Betas We show that asset betas for listed E & W water companies lie in the range of over both the short and long-term. This range includes the 0.39 figure recommended in our June report. In this updated report we have decided to present our beta estimates as a range reflecting the fluctuation in this parameter over time and across companies, and in recognition that different companies have different risk profiles. DGM Results Our DGM results are based on 2008 market data (excluding December). Dividend growth forecasts reflect analysts dividend forecasts over the near term and our assumption of different plausible projected long-term trend growth rates. We base our DGM-derived cost of equity estimates on a range of long-term dividend growth assumptions, given the inherent uncertainty in determining this estimate. The average DGM-based cost of equity range at a notional gearing ratio of 60% is %. The lower-end of the range is based on a long-term trend growth of dividends which is equal to historic dividend growth and slightly less than long-term projected GDP growth. The upper-end of the range is based on a projected long-term growth trend equal to analysts forecast of near term growth. The conclusions from the DGM largely coincide with the latest CAPM range based on our revised ERP of 5.4%. This coincidence confirms the plausibility of our ERP value in preference to the lower ERP range presented by the Competition Commission. Cost of Debt and Gearing Our analysis presents data on both historic time series data on debt costs and current debt costs for different ratings. Time series evidence shows that average real debt costs for A- rated debt have been in the range of % across a range of debt instruments over a ten year historic period. However, recent evidence based on new debt issues of A- debt shows average real costs in the range of % over the 3-month period to the end of November In addition, our analysis suggests that the transaction and pre-funding costs associated with this new debt are currently around 60 bps. In concluding on the cost of debt we recommend that the allowed cost of debt is the weighted average of the following two components: Long-term time series evidence on the cost of debt for the proportion of debt the sector will not refinance over AMP5; and Current evidence on the cost of debt for the proportion of new debt (i.e. refinancing of existing debt and new debt to finance AMP5). vi

9 The weights to attach to the historic and forward-looking debt costs should be determined by a detailed analysis of company financing and re-financing requirements over AMP5. This approach takes account of the fact that the industry may have raised finance efficiently at different parts of the interest rate cycle, but that the forward-looking cost of debt may be very different. 6 Overall, based on evidence up to November 2008, after allowing for transaction and pre-funding costs, we recommend that the allowed real cost of debt at PR09 should be in the range of % for A- rated debt. This range is a significant increase on our recommended range of % in our June report and reflects the fact that access to new debt finance has subsequently become markedly more expensive. Cost of Capital Taking into account all the available evidence, our best estimate of the real (fully) post-tax cost of capital for the E & W water sector at the current time is a range of %. Table 2 Cost of Capital for E & W Water Sector for PR09 (%) Estimate Gearing 60 Real Pre-Tax Cost of Debt Real Post-Tax Cost of Equity Tax Rate 28 Pre-tax WACC Vanilla WACC (Pre-tax debt, Post-tax equity) Post-tax WACC Source: NERA analysis We have not concluded on a point estimate of the cost of capital at this stage. This is due to the recent volatile nature of international capital markets which we recommend means that this cost of capital range needs to be reconsidered closer to PR09 Price Determinations. All aspects of the cost of capital will need to be reconsidered in light of developments in 2009, but in particular, the forward-looking cost of debt, ERP, DGM and risk-free rate estimates should be updated to reflect additional market data. Our cost of capital range of % is broadly in line with Ofwat s allowed cost of capital at PR04 of 5.1% before small company premium and financeability adjustments. Ofwat s 4.3% cost of debt allowance at PR04 lies at the top end of our % range, which reflects evidence on both the cost of raising new debt and the benchmark cost of existing water company debt. However, we note that the cost of new debt achievable by water 6 We note that the Competition Commission for Stansted (November 2008) has adopted a very similar approach where the cost of debt was weighted by the cost of existing debt cost and forward looking debt costs, taking into account the maturity profile of existing debt and the funding requirement of new capex. vii

10 companies has increased substantially in recent months and the debt markets will need to be monitored closely in the lead-up to PR09 in order to ensure that the allowed cost of capital does provide the right investment incentives at the margin. Ofwat s PR04 7.7% allowed return on equity is close to the middle of our % range, though this comparison is at least partially influenced by our slightly higher gearing assumption of 60% (compared to 55% by Ofwat at PR04). We note that there is some evidence from the most recent Water UK Investor Survey (March 2008) that certain risks (political, regulatory, force majeure and management) are perceived to have increased since PR04. Against this, there are some elements of the proposed PR09 methodology (revenue cap, symmetric treatment of capex overspends) that might be expected to reduce risk. Overall, it is important for Ofwat to fully justify the allowed rate of return at PR09 based on objective evidence. A simple benchmarking analysis drawing upon recent regulatory decisions to inform the cost of capital parameters would be an unsound approach to setting the allowed rate of return. In particular, Ofwat should not simply read-across from recent decisions such as those by the Competition Commission for Stansted or the Office of the Rail Regulator s decision for Network Rail as these decisions have not been market tested, differences in other aspects of the regulatory settlement may bias a direct comparison of the cost of capital and market conditions have changed dramatically since the analyses upon which these decisions were based were undertaken. Financeability In this report we have retained our assumption that the overall regulatory package (including the cost of capital) must allow companies to maintain an A- credit rating (or better), and we note that access to debt at ratings below A- has become markedly more expensive in recent months. This means that it is critical that Ofwat ensure that companies have sufficient headroom in their projected financial ratios to be able to raise finance at minimum A- ratings in both central case and plausible downside case scenarios. Rather than focussing solely on the K in the central case, financeability analysis should also aim to establish the range and likelihood of possible outcomes by financial modelling of scenarios, sensitivity and stress testing, and risk analysis designed to derive key financial measure statistics (best, worst, expected outcome, probability that the outcome is outside investment grade positions, risk of bankruptcy). This is so that the full implications of particular K s can be seen. In the current economic circumstances it is critical that this stress testing consider the potential impact of deflation upon companies financial ratios and the implications for credit ratings. Further, as part of this analysis the availability of market-based solutions to financeability should also be considered: our analysis shows that index-linked debt and new equity issuance are only likely to be available on a limited basis over AMP5. Evidence on MARs for listed WaSCs During the first half of AMP4, market values of regulated assets of listed WaSCs traded at premiums to their RCVs. At the time, Ofwat was concerned that observed MARs of significantly greater than 1.0 could be a sign of regulatory generosity with respect to the allowed rate of return. viii

11 In this report, we have updated our MAR analysis taking into account data up to the beginning of December Our analysis shows that the industry aggregate MAR has decreased since March 2008 from around 1.2 to around 1.0 in November The average aggregate MAR over AMP4 is around 1.1. However, we believe that we cannot attach significant weight to the informational value of MARs for the true cost of capital for the following reasons: First, the observed MAR range of is imprecise and requires an estimate to be made of the valuation of the non-regulated business which is surrounded by considerable uncertainty; Second, the portion of the MAR that is explained by other factors, such as expected out-performance is also imprecise. We have investigated what investors assume over AMP4 and beyond, but there is little objective data available to support this; Third, in trying to back out what a particular value of MAR means for the market cost of capital, a further assumption needs to be made about what cost of capital investors assume Ofwat will set at future price reviews. We believe the most plausible assumption that investors make is that any wedge between the market cost of capital and allowed rate of returns will only be temporary and that Ofwat will correct for any difference at future price reviews. If this is the case, MARs observed over AMP4 could imply a market cost of capital (real post-tax WACC) in the wide range of %. This range is too wide to infer any meaningful estimate for the cost of capital at PR09. In summary, the MAR evidence over AMP4 implies a very wide range for the cost of capital. After adjusting for out-performance, our estimated range for the (adjusted) MAR averaged over AMP4 is almost symmetric around 1 which shows that Ofwat s allowed rate of return at PR04 at 5.1% is within the plausible range for the cost of capital. However, the range is too wide to make a judgement with sufficient confidence on the implied cost of capital required by investors. December Update Although the WACC estimates in this report are based on data up to November 2008, we also include a chapter in this report that discusses the very latest debt market data in December 2008 that has become available to us during the finalisation of the report. We note that: Yields on A rated bonds traded in the secondary market were around 6.75% at the end of December (down from a peak of 7.5% in mid-november). The corresponding BBB yield was 8.7% (from a peak of 9.2%). December saw a small number of new bond issues in the UK sterling market with a wide difference in nominal yields from 6.1% (United Utilities) to 9.4% across A rated bonds of medium to long term maturities. Short term inflation expectations fell significantly during December. Overall, our analysis suggests that the real cost of new bond debt in the month of December is in a range of % for A- rated debt. This is similar to the real cost of new bond debt during the 3-months previously. We have therefore not adjusted our regulatory WACC estimate for this latest data. ix

12 Introduction We do emphasise, however, that real costs of debt in the range of % are high relative to historical levels. As with other cost of capital parameters, further evidence on the cost of new bond market debt will need to be reconsidered closer to PR09 Price Determinations. x

January Cost of Capital for PR09 A Final Report for Water UK

January Cost of Capital for PR09 A Final Report for Water UK January 2009 Cost of Capital for PR09 A Final Report for Water UK Project Team Dr Richard Hern Tomas Haug Anthony Legg Mark Robinson Contact Dr Richard Hern Ph: +44 (0)20 7659 8582 Fax: +44 (0)20 7659

More information

Cost of Capital Estimation for RIIO-ED1

Cost of Capital Estimation for RIIO-ED1 Cost of Capital Estimation for RIIO-ED1 Initial Estimates and Issues for WPD Dr. Richard Hern Director London 27 July 2012 Dominik Huebler Consultant Tomas Hozik Analyst Ofgem precedent on CoE Ofgem has

More information

Appendix A THE ALLOWED COST OF CAPITAL FOR NATS CP3 A REPORT FOR BRITISH AIRWAYS. December 2009 DRAFT. Cambridge Economic Policy Associates Ltd.

Appendix A THE ALLOWED COST OF CAPITAL FOR NATS CP3 A REPORT FOR BRITISH AIRWAYS. December 2009 DRAFT. Cambridge Economic Policy Associates Ltd. Appendix A THE ALLOWED COST OF CAPITAL FOR NATS CP3 A REPORT FOR BRITISH AIRWAYS December 2009 Prepared by: Cambridge Economic Policy Associates Ltd. 1 CONTENTS Executive Summary... 4 1. Introduction...

More information

Europe Economics Report for the Commission for Energy Regulation (CER)

Europe Economics Report for the Commission for Energy Regulation (CER) Europe Economics Report for the Commission for Energy Regulation (CER) Cost of Capital for Transmission Asset Owner (TAO), Transmission System Operator (TSO), Distribution System Operator (DSO) Appendices

More information

80 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

80 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Agenda Advancing economics in business Five years have passed since the trouble in the US subprime mortgage market and the subsequent financial crisis. Most utility regulators have made at least one price

More information

PwC Economics. Estimating the cost of capital for H7 A report prepared for the Civil Aviation Authority (CAA)

PwC Economics. Estimating the cost of capital for H7 A report prepared for the Civil Aviation Authority (CAA) PwC Economics Estimating the cost of capital for H7 A report prepared for the Civil Aviation Authority (CAA) November 2017 Table of Contents Summary...1 1. Introduction... 11 Assumptions... 11 Scope and

More information

Appendix B1 - The Cost of Capital for Openreach

Appendix B1 - The Cost of Capital for Openreach 1 Frontier Economics March 2009 Final Appendix B1 - The Cost of Capital for Openreach The note sets out Frontier s analysis of the appropriate cost of capital to be used when setting the proposed price

More information

Economic Regulation of Heathrow and Gatwick Airports. Advice to CAA on Aspects of Cost of Capital for the Final Price Control Decisions

Economic Regulation of Heathrow and Gatwick Airports. Advice to CAA on Aspects of Cost of Capital for the Final Price Control Decisions UK Civil Aviation Authority Economic Regulation of Heathrow and Gatwick Airports 2008-2013 - CAA Decision Supporting paper I Economic Regulation of Heathrow and Gatwick Airports 2008 2013 - CAA Decision

More information

CEPA review of CAA Economic regulation of capacity expansion at Heathrow: policy update and consultation, (CAP1610) cost of capital issues

CEPA review of CAA Economic regulation of capacity expansion at Heathrow: policy update and consultation, (CAP1610) cost of capital issues CEPA review of CAA Economic regulation of capacity expansion at Heathrow: policy update and consultation, (CAP1610) cost of capital issues For the Heathrow Airline Operators Committee (AOC), February 2018

More information

Staff Paper 3. Financing Scottish Water. 3.1 Introduction

Staff Paper 3. Financing Scottish Water. 3.1 Introduction Staff Paper 3 Financing Scottish Water This staff paper has been produced by our office to assist stakeholders in responding to the Draft Determination. The material reflected in this staff paper has informed

More information

THE COST OF CAPITAL FOR THE 2016 BNE PEAKING PLANT A NOTE PREPARED FOR THE REGULATORY AUTHORITIES SEPTEMBER Cambridge Economic Policy Associates

THE COST OF CAPITAL FOR THE 2016 BNE PEAKING PLANT A NOTE PREPARED FOR THE REGULATORY AUTHORITIES SEPTEMBER Cambridge Economic Policy Associates THE COST OF CAPITAL FOR THE 2016 BNE PEAKING PLANT A NOTE PREPARED FOR THE REGULATORY AUTHORITIES SEPTEMBER 2015 Submitted by: Cambridge Economic Policy Associates CONTENTS 1. Introduction... 1 1.1. Context...

More information

Recommendations for the Weighted Average Cost of Capital

Recommendations for the Weighted Average Cost of Capital Recommendations for the Weighted Average Cost of Capital 2020-2025 Final Report 27 November 2017 Submitted to the Consumer Council for Water by: Economic Consulting Associates Economic Consulting Associates

More information

Note on a Cost of Debt Indexation approach for Q6

Note on a Cost of Debt Indexation approach for Q6 Introduction Note on a Cost of Debt Indexation approach for Q6 Note prepared for British Airways 1 June 2013 In setting the cost of debt, the CAA has four principal approaches available. The first of these

More information

Sky s Cost of Capital. Annex 10 to pay TV phase three consultation document

Sky s Cost of Capital. Annex 10 to pay TV phase three consultation document Sky s Cost of Capital Annex 10 to pay TV phase three consultation document Publication date: 26 June 2009 Annex 10 to pay TV phase three document Sky s Cost of Capital Contents Section Page 1 Summary 2

More information

Table 6 1: Overview of our response to the preliminary decision on the rate of return

Table 6 1: Overview of our response to the preliminary decision on the rate of return 6. RATE OF RETURN Table 61: Overview of our response to the preliminary decision on the rate of return Components of rate of return Our response to preliminary decision Cost of equity Gamma Cost of debt

More information

Market Returns and Cost of Capital: A Refresh

Market Returns and Cost of Capital: A Refresh Market Returns and Cost of Capital: A Refresh Information Paper Publication date: 11 February 2015 1. About this document In March 2013, the Joint Regulators Group, (JRG), the predecessor to the UK Regulators'

More information

Comparison of OLS and LAD regression techniques for estimating beta

Comparison of OLS and LAD regression techniques for estimating beta Comparison of OLS and LAD regression techniques for estimating beta 26 June 2013 Contents 1. Preparation of this report... 1 2. Executive summary... 2 3. Issue and evaluation approach... 4 4. Data... 6

More information

Financial resilience analysis

Financial resilience analysis Appendix 13g: Financial resilience analysis Contents Objective 3 Method 3 Reverse stress testing 3 a. Method 3 b. Results 4 Forward stress testing 7 a. Method 7 b. Results 7 c. Summary 9 Scenarios prescribed

More information

Assessing the Financeability of Regulated Water Service Providers A report for the Essential Services Commission

Assessing the Financeability of Regulated Water Service Providers A report for the Essential Services Commission Assessing the Financeability of Regulated Water Service Providers A report for the Essential Services Commission 30 October 2013 Project Team Greg Houston Brendan Quach Nina Hitchins Dale Yeats NERA Economic

More information

Use of Inflation Indices in Water Sector Water UK

Use of Inflation Indices in Water Sector Water UK Water UK January 2016 Project Team Dr. Richard Hern Dr. Bill Baker James Grayburn Zuzana Janeckova Marija Spasovska Jinzi Guo NERA Economic Consulting Marble Arch House, 66 Seymour Street London W1H 5BT

More information

April The Cost of Capital for the DAA A Final Report for the DAA

April The Cost of Capital for the DAA A Final Report for the DAA April 2005 The Cost of Capital for the DAA A Final Report for the DAA Project Team Dr Richard Hern Phillippa Lowe NERA Economic Consulting 15 Stratford Place London W1C 1BE United Kingdom Tel: +44 20 7659

More information

A review of Ofwat s proposed approach to total market returns

A review of Ofwat s proposed approach to total market returns LLP A review of Ofwat s proposed approach to total market returns August 2017 LLP LLP Contents 1 Executive summary 2 2 Scope and objectives 11 3 Context of Ofwat s consultation 13 4 PwC s approach to estimating

More information

Response to Ofwat s Cost of Debt Consultation for PR19 For Portsmouth Water

Response to Ofwat s Cost of Debt Consultation for PR19 For Portsmouth Water Response to Ofwat s Cost of Debt Consultation for PR19 For Portsmouth Water 17 October 2016 Project Team James Grayburn Zuzana Janeckova Jinzi Guo NERA Economic Consulting Marble Arch House, 66 Seymour

More information

Implications of Observed Market-to-Asset Ratios for Cost of Equity at RIIO-T2

Implications of Observed Market-to-Asset Ratios for Cost of Equity at RIIO-T2 1 December 2017 Implications of Observed Market-to-Asset Ratios for Cost of Equity at RIIO-T2 0 By Dr Richard Hern, James Grayburn, Zuzana Janeckova and Jim Yin Overview National Grid (NG) commissioned

More information

Draft Gas Rate of Return Guidelines

Draft Gas Rate of Return Guidelines Draft Gas Rate of Return Guidelines Stakeholder Forum 3 September 2018 Agenda 01 Introduction and progress 02 High level overview of Draft Guidelines Matters that remain unchanged 03 High level overview

More information

Table 1: Arithmetic contributions to June 2016 CPl inflation relative to the pre-crisis average

Table 1: Arithmetic contributions to June 2016 CPl inflation relative to the pre-crisis average BANK OF ENGLAND Mark Carney Governor The Rt Hon Philip Hammond Chancellor of the Exchequer HM Treasury 1 Horse Guards Road London SW1A2HQ 4 August 2016 On 19 July, the Office for National Statistics published

More information

Company specific adjustments to the WACC A report prepared for Ofwat

Company specific adjustments to the WACC A report prepared for Ofwat www.pwc.co.uk Company specific adjustments to the WACC A report prepared for Ofwat August 2014 Contents Executive Summary 4 1. Introduction 7 Background 7 Structure of this report 8 2. Company-specific

More information

December Fair Market Value Assessment of Telemedia A Report for Belize Telemedia Limited

December Fair Market Value Assessment of Telemedia A Report for Belize Telemedia Limited December 2010 Fair Market Value Assessment of Telemedia A Report for Belize Telemedia Limited Project Team Dr Richard Hern Tomas Haug, CFA Signed: Dr Richard Hern NERA Economic Consulting 15 Stratford

More information

November Cost of Capital for LIME A Review of OUR s Proposals. A Report for LIME

November Cost of Capital for LIME A Review of OUR s Proposals. A Report for LIME November 2009 Cost of Capital for LIME A Review of OUR s Proposals A Report for LIME Project Team Dr Richard Hern Tomas Haug Svetlana Shcherbakova NERA Economic Consulting 15 Stratford Place London W1C

More information

19 FINANCEABILITY. Keith Mason Introduction

19 FINANCEABILITY. Keith Mason Introduction 19 FINANCEABILITY Keith Mason Introduction The regulated utilities sector is typically characterised by being capital intensive. This has been the case since privatisation for the water companies, and

More information

Debt Raising Transaction Costs Updated Report

Debt Raising Transaction Costs Updated Report M Debt Raising Transaction Costs Updated Report Debt raising transaction costs updated TransGrid January, 2015 Table of Contents 1. Executive Summary... 1 1.1 Total debt-raising transaction costs... 3

More information

Jemena Electricity Networks (Vic) Ltd

Jemena Electricity Networks (Vic) Ltd Jemena Electricity Networks (Vic) Ltd 2016-20 Electricity Distribution Price Review Regulatory Proposal Revocation and substitution submission Attachment 6-4 Frontier Economics - The required return on

More information

AER Draft Rate of Return Guideline Initial network sector perspectives

AER Draft Rate of Return Guideline Initial network sector perspectives AER Draft Rate of Return Guideline Initial network sector perspectives AER Public Forum, 2 August 2018 Andrew Dillon, CEO, Energy Networks Australia Craig de Laine, Chair, ENA Rate of Return Working Group/ENA-CRG

More information

Cost of Debt Comparative Analysis. (For discussion at stakeholder workshop to be held on 7 November 2013)

Cost of Debt Comparative Analysis. (For discussion at stakeholder workshop to be held on 7 November 2013) Chairmont Consulting Cost of Debt Comparative Analysis (For discussion at stakeholder workshop to be held on 7 November 2013) Version: Final Dated: 5 November 2013 Table of Contents 1 Executive Summary...

More information

Decisions on the Allowed Rate of Return Must Reflect Current Market Conditions, Not Simple Equations, Says German Court

Decisions on the Allowed Rate of Return Must Reflect Current Market Conditions, Not Simple Equations, Says German Court May 2018 Decisions on the Allowed Rate of Return Must Reflect Current Market Conditions, Not Simple Equations, Says German Court Authors: Tomas Haug, Lorenz Wieshammer 1 Regulatory Cost of Equity Determination

More information

Valuation of the Regulatory Asset Base: Submission on the Commerce Commission s Decision Paper

Valuation of the Regulatory Asset Base: Submission on the Commerce Commission s Decision Paper Valuation of the Regulatory Asset Base: Submission on the Commerce Commission s Decision Paper 10 November 2005 051104-powerco submission on valuation of rab.doc Table of Contents 1 Introduction... 1 2

More information

A11: Aligning risk and return. Supporting material

A11: Aligning risk and return. Supporting material A11: Aligning risk and return Supporting material OVERVIEW This appendix provides additional material in support of the Risk and Return section of our plan. In particular, it provides some additional explanation

More information

Principles and Trade-Offs When Making Issuance Choices in the UK

Principles and Trade-Offs When Making Issuance Choices in the UK Please cite this paper as: OECD (2011), Principles and Trade-Offs When Making Issuance Choices in the UK: Report by the United Kingdom Debt Management Office, OECD Working Papers on Sovereign Borrowing

More information

CER Review of the Weighted Average Cost of Capital for EirGrid

CER Review of the Weighted Average Cost of Capital for EirGrid CER Review of the Weighted Average Cost of Capital for EirGrid A Submission by EirGrid 26 July 2013 1. The CER has determined to undertake a review of the Weighted Average Cost of Capital (WACC) applying

More information

9. PROPOSED RATE OF RETURN

9. PROPOSED RATE OF RETURN PROPOSED RATE OF RETURN 9 9. PROPOSED RATE OF RETURN Key messages We need to be able to earn a fair rate of return on capital to continue investing in our network in a manner that best promotes our customers

More information

Review of the WACC Percentile A Report for the New Zealand Airports Association

Review of the WACC Percentile A Report for the New Zealand Airports Association A Report for the New Zealand Airports Association 5 May 2014 Project Team Greg Houston Brendan Quach Carol Osborne Ehson Shirazi NERA Economic Consulting Darling Park Tower 3 201 Sussex Street Sydney NSW

More information

A challenging initial assessment for the water companies in England and Wales

A challenging initial assessment for the water companies in England and Wales Agenda Advancing economics in business A challenging initial assessment for the water companies in England and Wales On 31 January, Ofwat published its Initial Assessment of Plans as part of the current

More information

MINUTES OF THE MONETARY POLICY COMMITTEE MEETING 4 AND 5 NOVEMBER 2009

MINUTES OF THE MONETARY POLICY COMMITTEE MEETING 4 AND 5 NOVEMBER 2009 Publication date: 18 November 2009 MINUTES OF THE MONETARY POLICY COMMITTEE MEETING 4 AND 5 NOVEMBER 2009 These are the minutes of the Monetary Policy Committee meeting held on 4 and 5 November 2009. They

More information

Cost of Capital. Determination

Cost of Capital. Determination Cost of Capital Determination 3 November 2009 Ref: MCD/11/09/090 Purpose: To set the cost of capital to be used in subsequent calculations for the costs of provision of telecommunications services in the

More information

15B. TARGET CREDIT RATINGS FOR WATER COMPANIES AT PR19

15B. TARGET CREDIT RATINGS FOR WATER COMPANIES AT PR19 Anglian Water 15B. TARGET CREDIT RATINGS FOR WATER COMPANIES AT PR19 Target credit ratings for water companies at PR19 13 February 2018 Anton Krawchenko Director, Capital and Debt Advisory Office: +44

More information

Equity Market Risk Premium Research Summary

Equity Market Risk Premium Research Summary Equity Market Risk Premium Research Summary 24 January 2018 1 We recommend a MRP of 5.5% as per 31 December 2017 If you are reading this, it is likely that you are in regular contact with KPMG on the topic

More information

submission To the QCA 9 March 2015 QRC Working together for a shared future ABN Level Mary St Brisbane Queensland 4000

submission To the QCA 9 March 2015 QRC Working together for a shared future ABN Level Mary St Brisbane Queensland 4000 Working together for a shared future To the QCA 9 March 2015 ABN 59 050 486 952 Level 13 133 Mary St Brisbane Queensland 4000 T 07 3295 9560 F 07 3295 9570 E info@qrc.org.au www.qrc.org.au Page 2 response

More information

Cost of Debt Modelling under Ofgem s RIIO-ED1 Method A Preliminary Assessment for WPD. Richard Hern Tomas Haug Ben Tannenbaum

Cost of Debt Modelling under Ofgem s RIIO-ED1 Method A Preliminary Assessment for WPD. Richard Hern Tomas Haug Ben Tannenbaum Cost of Debt Modelling under Ofgem s Method A Preliminary Assessment for WPD Richard Hern Tomas Haug Ben Tannenbaum London, 14 August 2012 Terms of Reference Ofgem s framework determines the allowed cost

More information

Embedding Financial Viability and Sustainability

Embedding Financial Viability and Sustainability Embedding Financial Viability and Sustainability September 2011 The purpose of this paper is to review the RIC s approach utilized for the first price control period to assessing financeability and to

More information

Economic regulation of capacity expansion at Heathrow: policy update and consultation

Economic regulation of capacity expansion at Heathrow: policy update and consultation Consumers and Markets Group Economic regulation of capacity expansion at Heathrow: policy update and consultation CAP 1610 Published by the Civil Aviation Authority, 2017 Civil Aviation Authority, Aviation

More information

Appendix C: Rate of Return

Appendix C: Rate of Return Appendix C: Rate of Return Introduction The capital already invested in the network and the financing and costs associated with that capital, has by far the greatest impact on prices. The cost of funding

More information

16 JUNE 2017 THE COST OF CAPITAL FOR GNI FOR THE PERIOD OCTOBER 2017 TO SEPTEMBER 2022 A REPORT TO THE COMMISSION FOR ENERGY REGULATION

16 JUNE 2017 THE COST OF CAPITAL FOR GNI FOR THE PERIOD OCTOBER 2017 TO SEPTEMBER 2022 A REPORT TO THE COMMISSION FOR ENERGY REGULATION THE COST OF CAPITAL FOR GNI FOR THE PERIOD OCTOBER 2017 TO SEPTEMBER 2022 A REPORT TO THE COMMISSION FOR ENERGY REGULATION Table of contents Glossary Section 1. Introduction 1 2. Executive summary 4 3.

More information

TRAILING AVERAGE COST OF DEBT AND EFFICIENT DEBT MANAGEMENT

TRAILING AVERAGE COST OF DEBT AND EFFICIENT DEBT MANAGEMENT TRAILING AVERAGE COST OF DEBT AND EFFICIENT DEBT MANAGEMENT A REPORT BY TRANSPOWER NZ LTD February 2016 1 TRAILING AVERAGE COST OF DEBT AND EFFICIENT DEBT MANAGEMENT Transpower New Zealand Limited 2016.

More information

What is the right discount rate for an ALF?

What is the right discount rate for an ALF? What is the right discount rate for an ALF? An alternative approach Prepared for Vodafone 17 January 2014 www.oxera.com - ALF fee - choice of discount rate Contents Executive summary 2 1 Background 3 1.1

More information

In Defense of Fairness Opinions

In Defense of Fairness Opinions In Defense of Fairness Opinions A N E M P I R I C A L R E V I E W O F T E N Y E A R S O F D ATA 2 Addressing Criticism With Research Questions about the utility of fairness opinions have periodically seized

More information

16 December The Cost of Capital for KPN's Wholesale Activities. A Final Report for OPTA

16 December The Cost of Capital for KPN's Wholesale Activities. A Final Report for OPTA 16 December 2005 The Cost of Capital for KPN's Wholesale Activities A Final Report for OPTA NERA Economic Consulting 15 Stratford Place London W1C 1BE United Kingdom Tel: +44 20 7659 8500 Fax: +44 20 7659

More information

Estimating risk-free rates for valuations

Estimating risk-free rates for valuations Estimating risk-free rates for valuations Introduction Government bond yields are frequently used as a proxy for riskfree rates and are critical to calculating the cost of capital. Starting in 2008, significant

More information

Weighted Average Cost of Capital (WACC) Consultation Paper ( )

Weighted Average Cost of Capital (WACC) Consultation Paper ( ) Weighted Average Cost of Capital (WACC) Consultation Paper Periodic review of input values for TSO/MO and DSO (2018-2022) DISCLAIMER This Consultation Paper has been prepared by ERO in order to inform

More information

Jemena Gas Networks (NSW) Ltd

Jemena Gas Networks (NSW) Ltd Jemena Gas Networks (NSW) Ltd 2015-20 Access Arrangement Response to the AER's draft decision and revised proposal Appendix 7.5 - The required return on equity for the benchmark efficient entity Public

More information

RIIO T1 Business Plan. Section 9 Financial Strategy

RIIO T1 Business Plan. Section 9 Financial Strategy RIIO T1 Business Plan Section 9 Financial Strategy Formal Issue: 28 July 2011 File Ref: 2011_SPT_Narrative_9 Financial Strategy Financial Strategy 9. FINANCIAL STRATEGY Contents 9. FINANCIAL STRATEGY...

More information

The real risk free interest rate in thin debt markets

The real risk free interest rate in thin debt markets The real risk free interest rate in thin debt markets By Michael Lawriwsky 1 Abstract It is standard practice in economic regulation in Australia for prices and underlying asset values to be escalated

More information

The Evidence for Differences in Risk for Fixed vs Mobile Telecoms For the Office of Communications (Ofcom)

The Evidence for Differences in Risk for Fixed vs Mobile Telecoms For the Office of Communications (Ofcom) The Evidence for Differences in Risk for Fixed vs Mobile Telecoms For the Office of Communications (Ofcom) November 2017 Project Team Dr. Richard Hern Marija Spasovska Aldo Motta NERA Economic Consulting

More information

Ofwat PR19 review. The Cost of Capital setting the scene for PR19. Economic Consulting Associates. May 2017

Ofwat PR19 review. The Cost of Capital setting the scene for PR19. Economic Consulting Associates. May 2017 Ofwat PR19 review The Cost of Capital setting the scene for PR19 May 2017 Submitted to the Consumer Council for Water by: Economic Consulting Associates Economic Consulting Associates Limited 41 Lonsdale

More information

2. Regulatory principles to assess the most appropriate WACC methodology

2. Regulatory principles to assess the most appropriate WACC methodology BACKGROUND DOCUMENT DESCRIBING THE COMMISSION SERVICES WORKING ASSUMPTIONS FOR THE DETERMINATION OF THE WEIGHTED AVERAGE COST OF CAPITAL (WACC) IN REGULATORY PROCEEDINGS IN THE ELECTRONIC COMMUNICATIONS

More information

Jemena Gas Networks (NSW) Ltd

Jemena Gas Networks (NSW) Ltd Jemena Gas Networks (NSW) Ltd 2015-20 Access Arrangement Response to the AER's draft decision and revised proposal Appendix 7.3 - Dividend discount model Public 27 February 2015 APPENDIX M M 2 Public 30

More information

APPENDIX B CRITIQUE OF EVIDENCE PRESENTED BY DR. MORIN

APPENDIX B CRITIQUE OF EVIDENCE PRESENTED BY DR. MORIN APPENDIX B CRITIQUE OF EVIDENCE PRESENTED BY DR. MORIN 1.0 Introduction The purpose of this critique is to show that the «base» equity risk premium estimates of a fair rate of return made by Dr. Morin

More information

Do utilities provide a good hedge against inflation?

Do utilities provide a good hedge against inflation? Agenda Advancing economics in business Utilities and hedging inflation Do utilities provide a good hedge against inflation? How are utilities affected by the current inflation outlook, which is characterised

More information

Mobile Telecommunications Fixed Line telecommunications Broadcasting (Market A and Market B) Date: 18/12/2014

Mobile Telecommunications Fixed Line telecommunications Broadcasting (Market A and Market B) Date: 18/12/2014 Cost of Capital Mobile Telecommunications Fixed Line telecommunications Broadcasting (Market A and Market B) Response to Consultation and Decision Reference: ComReg Document 14/136 & D15/14 Date: 18/12/2014

More information

The reasons why inflation has moved away from the target and the outlook for inflation.

The reasons why inflation has moved away from the target and the outlook for inflation. BANK OF ENGLAND Mark Carney Governor The Rt Hon George Osborne Chancellor of the Exchequer HM Treasury 1 Horse Guards Road London SW1A2HQ 12 May 2016 On 12 April, the Office for National Statistics (ONS)

More information

Donald L Kohn: Asset-pricing puzzles, credit risk, and credit derivatives

Donald L Kohn: Asset-pricing puzzles, credit risk, and credit derivatives Donald L Kohn: Asset-pricing puzzles, credit risk, and credit derivatives Remarks by Mr Donald L Kohn, Vice Chairman of the Board of Governors of the US Federal Reserve System, at the Conference on Credit

More information

Our ref. Comment letter on Discussion Paper DP/2018/1 Financial Instruments with Characteristics of Equity

Our ref. Comment letter on Discussion Paper DP/2018/1 Financial Instruments with Characteristics of Equity Tel +44 (0) 20 7694 8871 15 Canada Square Reinhard.Dotzlaw@kpmgifrg.com London E14 5GL United Kingdom Mr Hans Hoogervorst International Accounting Standards Board Columbus Building 7 Westferry Circus London

More information

A Report on Profitability. Paul A. Grout

A Report on Profitability. Paul A. Grout A Report on Profitability Paul A. Grout September 29 Background Executive Summary I have been asked to provide a high level opinion on three questions arising from Ofcom's Pay TV Phase 3 document dated

More information

Equity Market Risk Premium Research Summary 30 September 2018

Equity Market Risk Premium Research Summary 30 September 2018 Equity Market Risk Premium Research Summary 30 September 2018 1 We recommend a MRP of 5.5% as per 30 September 2018 If you are reading this, it is likely that you are in regular contact with KPMG on the

More information

Q4 QUARTERLY GUIDE PENSIONS ACCOUNTING

Q4 QUARTERLY GUIDE PENSIONS ACCOUNTING Q4 QUARTERLY GUIDE PENSIONS ACCOUNTING As at 31 December 2017 Guidance for Finance Directors 1 QUARTERLY GUIDE TO PENSIONS ACCOUNTING ASSUMPTIONS REPORT DECEMBER 2017 QUARTERLY GUIDE TO PENSIONS ACCOUNTING

More information

Consultation Process Cost of Equity: BK

Consultation Process Cost of Equity: BK Bundesnetzagentur Beschlusskammer 4 Stichwort Zinssatz Strom Postfach 8001 53105 Bonn Per email: zinssatzstrom@bnetza.de 5 August 2016 Dear Beschlusskammer 4, Dear Mr. Lüdtke-Handjery, Dear Mr. Lamoratta,

More information

Central bank asset purchases and financial markets

Central bank asset purchases and financial markets 1 Central bank asset purchases and financial markets Speech given by David Miles, External Member of the Monetary Policy Committee, Bank of England At the Global Borrowers & Investors Forum London 26 June

More information

What is the impact of ORR s inflation proposals on Network Rail?

What is the impact of ORR s inflation proposals on Network Rail? What is the impact of ORR s inflation proposals on Network Rail? Note prepared for Network Rail September 3rd 2012 1 Introduction and summary There is a well-established precedent for using some form of

More information

Northumbrian Water response to Water 2020: consultation on the approach to the cost of debt for PR19

Northumbrian Water response to Water 2020: consultation on the approach to the cost of debt for PR19 Northumbrian Water response to Water 2020: consultation on the approach to the cost of debt for PR19 Overview We welcome the consultation on the approach to the cost of debt. In preparing this response,

More information

Equity Market Risk Premium Research Summary. 19 October 2017

Equity Market Risk Premium Research Summary. 19 October 2017 Equity Market Risk Premium Research Summary 19 October 2017 1 We recommend a MRP of 5.5% as per 30 September 2017 If you are reading this, it is likely that you are in regular contact with KPMG on the

More information

The Purple Book DB PENSIONS UNIVERSE RISK PROFILE

The Purple Book DB PENSIONS UNIVERSE RISK PROFILE The Purple Book DB PENSIONS UNIVERSE RISK PROFILE 2017 2 the purple book 2017 The Purple Books give the most comprehensive picture of the risks faced by the PPF-eligible defined benefit pension schemes.

More information

Recent Developments in Banks Funding Costs and Lending Rates

Recent Developments in Banks Funding Costs and Lending Rates Recent Developments in Banks Funding Costs and Lending Rates Anna Brown, Michael Davies, Daniel Fabbro and Tegan Hanrick* The global financial crisis has affected the cost and composition of Australian

More information

IAS 21 Extreme long-term lack of exchangeability Item for continuing consideration

IAS 21 Extreme long-term lack of exchangeability Item for continuing consideration STAFF PAPER IFRS Interpretations Committee Meeting June 2018 Project Paper topic IAS 21 Extreme long-term lack of exchangeability Item for continuing consideration CONTACT(S) Vincent Louis vlouis@ifrs.org

More information

Discussion Paper - Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to Macro Hedging

Discussion Paper - Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to Macro Hedging THE CHAIRPERSON Hans Hoogervorst Chairman International Accounting Standards Board (IASB) 30 Cannon Street London EC4M 6XH 16 October 2014 Discussion Paper - Accounting for Dynamic Risk Management: a Portfolio

More information

Attachment 9. Rate of return and forecast inflation Water and Sewerage Price Proposal. 30 June 2017

Attachment 9. Rate of return and forecast inflation Water and Sewerage Price Proposal. 30 June 2017 Attachment 9 Rate of return and forecast inflation 30 June 2017 2018 23 Water and Sewerage Price Proposal Icon Water Page 2017 Icon Water Limited (ABN 86 069 381 960) This publication is copyright and

More information

V. RECENT EQUITY MARKET DEVELOPMENTS AND IMPLICATIONS

V. RECENT EQUITY MARKET DEVELOPMENTS AND IMPLICATIONS V. RECENT EQUITY MARKET DEVELOPMENTS AND IMPLICATIONS Starting in mid-july of this year, the equity markets of most economies began to turn down and by early October had fallen by to 35 per cent. The drops

More information

Chapter 8: Prospective Analysis: Valuation Implementation

Chapter 8: Prospective Analysis: Valuation Implementation Chapter 8: Prospective Analysis: Valuation Implementation Key Concepts in Chapter 8 Two key issues must be addressed to implement valuation theory: 1. Determining the appropriate discount rate to use in

More information

FRAMEWORK FOR SUPERVISORY INFORMATION

FRAMEWORK FOR SUPERVISORY INFORMATION FRAMEWORK FOR SUPERVISORY INFORMATION ABOUT THE DERIVATIVES ACTIVITIES OF BANKS AND SECURITIES FIRMS (Joint report issued in conjunction with the Technical Committee of IOSCO) (May 1995) I. Introduction

More information

Table 1: Arithmetic contributions to September 2015 CPI inflation relative to the pre-crisis Percentage points average.

Table 1: Arithmetic contributions to September 2015 CPI inflation relative to the pre-crisis Percentage points average. Mark Carney Governor The Rt Hon George Osborne Chancellor of the Exchequer HM Treasury 1 Horse Guards Road London SW1A2HQ 5 November 2015 f In August I wrote a third letter to you when CPI inflation remained

More information

Assessing the reliability of regression-based estimates of risk

Assessing the reliability of regression-based estimates of risk Assessing the reliability of regression-based estimates of risk 17 June 2013 Stephen Gray and Jason Hall, SFG Consulting Contents 1. PREPARATION OF THIS REPORT... 1 2. EXECUTIVE SUMMARY... 2 3. INTRODUCTION...

More information

Towards a risk and reward framework for PR19: an exploration of the relationships between incentives, cost allowances and rates of return

Towards a risk and reward framework for PR19: an exploration of the relationships between incentives, cost allowances and rates of return Towards a risk and reward framework for PR19: an exploration of the relationships between incentives, cost allowances and rates of return A report for Thames Water Utilities Limited March 2017 Disclaimer

More information

1.1. Low yield environment

1.1. Low yield environment 1. Key developments Overall, the macroeconomic outlook has deteriorated since June 215. Although many European countries continue to recover, economic growth still remains fragile reflecting high public

More information

Index-linked bonds 2.0: introducing CPI-linked securities

Index-linked bonds 2.0: introducing CPI-linked securities Agenda Advancing economics in business Index-linked bonds 2.0: introducing CPI-linked securities The first ever CPI-linked bond in June 2015 heralds a milestone in UK capital markets. It follows calls

More information

Investor summary. Our Fast Track Plan

Investor summary. Our Fast Track Plan Investor summary Our Fast Track Plan An introduction from the Chief Executive We re truly delighted Severn Trent has been selected as one of only three Fast Track companies by Ofwat in its assessment of

More information

Better equity: submission to the AER s Equity beta issues paper

Better equity: submission to the AER s Equity beta issues paper Better equity: submission to the AER s Equity beta issues paper 28 October 2013 Bev Hughson, Darach Energy Consulting Services Carolyn Hodge, Senior Policy Officer, Energy+Water Consumers Advocacy Program

More information

Information Paper. The Split Cost of Capital Concept

Information Paper. The Split Cost of Capital Concept Information Paper The Split Cost of Capital Concept February 2014 We wish to acknowledge the contribution of the following staff to this report: Michael S. Blake, Ralph Donnet, John Fallon, Dan Kelley

More information

National Electricity Law And National Gas Law Amendment Package: Creating a binding rate of return instrument

National Electricity Law And National Gas Law Amendment Package: Creating a binding rate of return instrument National Electricity Law And National Gas Law Amendment Package: Creating a binding rate of return instrument Response to COAG Energy Council Senior Committee of Officials 13 April 2018 Contents 1 Executive

More information

Q3 QUARTERLY GUIDE PENSIONS ACCOUNTING

Q3 QUARTERLY GUIDE PENSIONS ACCOUNTING Q3 QUARTERLY GUIDE PENSIONS ACCOUNTING As at 30 September 2017 Guidance for Finance Directors 1 QUARTERLY GUIDE TO PENSIONS ACCOUNTING ASSUMPTIONS REPORT SEPTEMBER 2017 QUARTERLY GUIDE TO PENSIONS ACCOUNTING

More information

Orange response to the ERG Paper Principles of Implementation and Best Practice for WACC calculation

Orange response to the ERG Paper Principles of Implementation and Best Practice for WACC calculation Orange response to the ERG Paper Principles of Implementation and Best Practice for WACC calculation I Introduction Orange supports the Principles of Implementation and Best Practice (PIBs) set out in

More information

Macro vulnerabilities, regulatory reforms and financial stability issues IIF Spring Meeting

Macro vulnerabilities, regulatory reforms and financial stability issues IIF Spring Meeting 25.05.2016 Macro vulnerabilities, regulatory reforms and financial stability issues IIF Spring Meeting Luis M. Linde Governor I would like to thank Tim Adams, President and Chief Executive Officer of

More information

Developments in the allowed cost of capital

Developments in the allowed cost of capital Developments in the allowed cost of capital Moody s 2017 UK Water Sector Conference London, UK Sahar Shamsi, Senior Consultant 17 October 2017 Overview The Ofwat PR19 WACC not only matters for the water

More information