A Few Things Transport Regulators Should Know About Risk and the Cost of Capital
Author(s)
Alexander, Ian; Estache, Antonio; Oliveri, Adele
Abstract
In reviewing contracts, establishing price limits, or arbitrating conflicts, regulatory agencies and policy advisors face significant information asymmetry in determining the appropriate allowed rate of return, or discount rate. The information gap is especially important in determining the degree of market risk – often a critical component of the cost of capital demanded by operators. The authors consider various methodological problems in the transport sector in establishing the link between regulatory regime and degree of market risk The results of quantitative studies confirm that even for the transport sector – where there is intermodal competition and where contracts are often shorter and regulatory decisions may be less pressing than for utilities – the choice of regulatory regime greatly affects the degree of market risk a company faces.
