National Grid (NG) commissioned NERA Economic Consulting to consider the evidence on market-to-asset ratios (MARs) for NG and listed UK water companies and the implications for the cost of equity for RIIO-T2.

NERA prepared a brief report, which in addition to examining MARs and cost of equity for RIIO-T2, also responds to recent publications on this topic. NERA’s report specifically addresses a report by PwC that was commissioned by Ofwat, which considered the implications of water companies’ MARs for the cost of equity at PR19 (2020–2025).

NERA’s analysis shows that it is necessary to make sizeable and uncertain adjustments, e.g., for substantive US non-regulated assets in the case of NG, to derive adjusted MARs relevant to UK regulated network businesses. For example, NERA shows that the relevant MAR for NG’s UK network business lies in the range of 0.35 to 1.46, which demonstrates the implausibility of drawing on MAR evidence for NG to inform investors’ cost of equity. More generally, we find that MARs for both NG and listed UK water networks, once correctly adjusted for non-regulated activities, outperformance opportunities, and other factors, provide no evidence that allowed returns are higher than investors’ cost of equity.