Cost of Capital and the Regulator's Preferences: An Investigation into a New Method of Estimating Regulatory Beta

Abstract

When computing regulated prices, the standard method is the capital asset pricing model (CAPM) which involves the estimation of a single parameter: the beta of the company. Yet, these computational methods fail to take into account any preference the regulator might have to increase or decrease the beta to favour or punish investors or customers. We propose such a methodology based on what we call a Linex linear optimal method.