Cost of Equity for Regulated Networks: Recent Developments in Continental Europe

Mon Apr 01 04:00:00 UTC 2019
Tomas Haug and Lorenz Wieshammer

In the April issue of The Electricity Journal, NERA Managing Director Tomas Haug and Economic Analyst Lorenz Wieshammer examine recent developments in continental Europe regarding cost of equity for regulated networks. They found that many European regulatory agencies rely solely upon historical data to set the allowed cost of equity for electricity and gas network operators. Under current capital market conditions, however, this approach often produces biased estimates. The authors conclude that the trend of using historical data to set the allowed cost of equity should therefore be replaced or complemented by alternative approaches that are readily available. Whether alternative approaches—such as forward-looking models—will be adopted will depend largely on pending legal proceedings at the German Federal Supreme Court.