Cost of Capital for Utilities: A Cross Country Survey and Synthesis

Abstract

While reforms in utility industries have encouraged competition, the continued existence of monopoly power in parts of those industries has left a residual need for some form of prices regulation. Infrastructure industries such as telecommunications and electricity are examples where there can be such a residual need for regulation. With regulation now very much focused on pricing of key bottleneck facilities, the success of prices regulation will be an important determinant of investment in infrastructure sectors, with implications for economic growth more generally. The determination of cost of capital for utilities for the purpose of price regulation has always been a contentious issue. In this paper we survey the issues in the determination of capital for utilities, especially when the economy is dominated by public sector undertakings that are unlisted. We also present a survey of practices around the world.