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The Cost of Equity of Network Operators – Empirical Evidence and Regulatory Practice

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  • S. Schaeffler
  • C. Weber

Abstract

In many European countries, the deregulation of energy markets made the task of setting an adequate cost of equity more difficult. The question arises, how regulators set equity returns for network operators and whether the methodologies applied are in line with state-of-the-art capital market models. Based on an analysis of empirical results published and an own data set of more than 20 network operators, we show that most regulatory agencies do not set interest rates in an optimal way. Firstly, they either include companies with other systematic risk (e.g. integrated utilities) in their datasets. Secondly, they rely solely on CAPM even if the use of a size factor can potentially increase quality of results. The article concludes by providing a suggestion on how to put the FF TFM into practice accounting for the size of non-stock listed network operators.

Suggested Citation

  • S. Schaeffler & C. Weber, 2013. "The Cost of Equity of Network Operators – Empirical Evidence and Regulatory Practice," Competition and Regulation in Network Industries, Intersentia, vol. 14(4), pages 385-411, December.
  • Handle: RePEc:sen:journl:v:14:i:4:y:2013:p:385-411
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    Cited by:

    1. Schober, Dominik & Schäffler, Stephan & Weber, Christoph, 2014. "Idiosyncratic risk and the cost of capital: The case of electricity networks," ZEW Discussion Papers 14-010, ZEW - Leibniz Centre for European Economic Research.
    2. Lena Kitzing & Christoph Weber, "undated". "Support mechanisms for renewables: How risk exposure influences investment incentives," EWL Working Papers 1403, University of Duisburg-Essen, Chair for Management Science and Energy Economics, revised Aug 2014.
    3. Dominik Schober & Stephan Schaeffler & Christoph Weber, 2014. "Idiosyncratic risk and the cost of capital: the case of electricity networks," Journal of Regulatory Economics, Springer, vol. 46(2), pages 123-151, October.

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