Determining the Weighted Average Cost of Capital of Airports in an Evolving French Regulatory Environment (French translation)

Mon Jul 21 16:24:00 EDT 2014
By Jeanne Lubek and Stéphane Wakeford

The weighted average cost of capital (WACC) is central to French airport price-cap regulation. However, French regulation remains silent on the key parameters and methodologies used to determine the WACC, resulting in differing appreciations of the correct cost of capital which should be used to determine the evolution of airport charges. In the context of the privatization of French regional airports, this regulatory uncertainty is problematic as the state acts both as a regulator and as a shareholder, thereby undermining the confidence of airlines in the current regulatory framework. Furthermore, the lack of predictability of the price setting mechanism burdens potential buyers of French airports with a strong regulatory risk regarding the next price control periods.

In this NERA paper, Associate Director Jeanne Lubek and Economic Analyst Stéphane Wakeford note that incremental changes to the current regulation towards more economic standards would benefit both airport users and operators. In addition, these changes would prevent the French price-cap regulation from becoming akin to a disguised rate-of-return regulation, of which the perverse effects have been widely documented (most notably, the Averch-Johnson effect regarding the tendency of rate-of-return regulation to result in overinvestment).