The UK Regulators Network(UKRN), which lists Ofwat amongst its members, has published a new information paper on its ongoing cost of capital project.

The refresh report by the economic regulators on the cost of capital has been published by the UKRN's Cost of Capital Working Group - Martyn Andrews Director of Corporate Finance at Ofwat, is a member.

The market returns and cost of capital project is aiming to address a number of questions, including:

• Can the regulators create better alignment in how they arrive at the cost of capital?
• Can variations in the cost of capital between companies and sectors be explained by reference to industry specific characteristics?
• Or are the differences the result of numerous teams of people taking alternative views of similar issues?

In addition to the regulators’ statutory duties to customers,  they may also be required to secure that companies can finance their functions by setting an appropriate rate of return on the capital used in providing the regulated services.

The rate of return, provided by setting a cost of capital, is considered essential to facilitate continuing investment in UK infrastructure. In assessing whether a business is able to finance and deliver its regulated functions, the cost of capital forms a key component of the price control work by regulators in a range of sectors.

The regulators currently each calculate independently a forward looking cost of capital which can then apply during a price control period.

The cost of capital project is also seeking to address whether the UK’s independent economic regulators can carry out their duties more efficiently and effectively through sharing best practice and developing a consistent and transparent approach to setting the cost of capital.

The UKRN considers there is evidence that the determination of the cost of capital could be approached collaboratively under a common methodology framework. However, it also recognises the need to consider in parallel the potential risks associated with following a common framework which could fetter an individual regulator’s judgement in serving the interests of customers.

The new information paper, which sets out the cost of capital employed in recent price controls up to December 2014, is a first step in the process.

UKRN said it would welcome comments on the paper which should be emailed to Martyn Andrews of Ofwat at This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Following on from this, together with future discussions with other interested parties e.g. credit rating agencies, market representatives and the CMA, the UKRN is proposing to explore opportunities in working together as economic regulators to reduce the perceived level of regulatory risk when they set the cost of capital.

Click here to download Market Returns and Cost of Capital: A Refresh.