Published: 23rd March 2023

UKRN are delighted to announce that we have today published the guidance on the methodology for setting the cost of capital.

The regulators involved in setting the main price controls recognise the value of further alignment in the approaches and ultimately the common parameter values used in each sector.

In November 2021, Ofgem, Ofcom and Ofwat were joined by the CAA, the Utility Regulator and the ORR to establish the UKRN Cost of Capital Task Force, with a clear objective to collaborate on the production and delivery of a set of guidance which aims to achieve great transparency and consistency in decisions.

The delivery of this guidance is a critical step towards reducing uncertainty associated with final price control outcomes and allow for easier cross-sector comparisons.

Chris Hemsley, Managing Director of the Payment Systems Regulator (PSR) & UKRN CEO says;

As the newly appointed CEO of UKRN it gives me great pleasure that one of my first tasks is to publish the Cost of Capital Methodology Paper. This paper brings together contributions from across the group of economic regulators and the delivery of this guidance is a critical step towards reducing uncertainty associated with final price control outcomes and allowing for easier cross-sector comparisons.

The collaboration between the regulators involved has been outstanding.  It is an example of the work that UKRN and its members are able to do to deliver work that cuts across our sectors.  This reflects the UKRN’s focus on delivering “excellence through collaboration”.

I would like to thank the regulators involved: Ofwat; Ofcom; Ofgem; the CAA, the Utility Regulator and the ORR. I am also grateful to those many stakeholders who have engaged and supported the work.

Paul Smith, CAA Joint-Interim CEO & UKRN Chair Cost of Capital Directors says;

Estimating the cost of capital for regulated businesses is one of the most impactful decisions regulators make. Inevitably, therefore we put a lot of time and resource in to this work.

But as it is something that many sectors regulators do, it should be the case that we can look to work together more and achieve greater alignment, particularly on the non-company specific parameters.

Working together we have been able to develop the first ever UKRN position to move towards greater alignment on the approach to cost of capital.

We look forward to working with other regulators as we take account of this UKRN document in our future work on cost of capital to make decisions in the interests of consumers.

Andrew Chesworth, Ofwat Director PR24 & UKRN Cost of Capital Task Force Chair says;

In November 2021 the UKRN cost of capital Task Force was established to identify areas where the economic regulators could be more aligned in their methodologies.

Following significant collaboration between regulators and consultation with interested parties the Task Force identified nine recommendations to be followed in future regulatory decisions. Our aim has been to improve the predictability of regulatory decision making, thereby reducing the risk of investing in UK infrastructure and benefiting customers by lowering costs and supporting investment.

As Chair of the Task Force, I am thankful for the support and engagement from the regulators participating on this work: Ofwat; Ofcom; Ofgem; the CAA; the Utility Regulator and the ORR.  I am also thankful for the input of the peer reviewers and their contributions to this work in the consultation phase.