Regulatory Finance

Frontier Economics applies its expertise in financial economics to the regulation of network industries.

When setting a regulated business’s allowed revenues or prices, regulators need to decide on the rate of return such businesses are permitted to earn on their investments.  This rate is known as the ‘Weighted Average Cost Of Capital’ (WACC).  Frontier Economics has deep experience in estimating the WACC for a wide range of regulated businesses including electricity networks, gas pipelines, water businesses and rail networks.

We have provided advice on WACC to regulators and regulated businesses in Australia, New Zealand, the UK, and several countries in Europe, Asia, the Middle East and the Caribbean.

Regulators use ‘Financeability Tests’ to check the expected impact of their regulatory determinations on the financial health of a business. Frontier builds ‘Financeability Models’ that can help assess the effect of regulatory decisions on credit ratings and key financial metrics.

Competition authorities sometimes undertake ex post profitability assessments of individual firms or industries to check for evidence of excess returns.  Such evidence can lead to formal economic regulation of the business or industry in question.  We build bespoke profitability models that can be used to test for excess returns.  We have used such models to support businesses through competition inquiries, and have also constructed such models to help regulators with their investigations.

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