At the 2000 Distribution Price Control Review, Ofgem estimated the cost of equity for Regional Electricity Distribution Companies (RECs) using the CAPM methodology. A key issue in application of this methodology concerns estimation of the beta coefficient, which measures the degree of riskiness of the company (or industry) relative to the market portfolio.

This Topic presents estimates of beta for the UK Electricty Index using the Kalman Filter technique. We show that using the Kalman Filter technique, the betas for the UK electricity index exhibited a sharp downward trend, falling from the 1.0 in 1993–1997 to around 0.2 in 2000 but, in the most recent months, the betas have started to increase again up to around 0.6 at the end of 2002.