Setting the risk adjusted cost of capital for Network Rail

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Client Office of Rail Regulation (ORR)
Dates 2013
Sector(s)Transport
Service(s)Policy & Economics, Regulation & Competition
CEPA was commissioned by the ORR to arrive at a risk adjusted cost of capital for Network Rail as part of the Network Rail’s fifth price control review (CP5), as CEPA had done for the regulator prior to CP4. The CP5 price control will last from 2014 to 2019. A particular challenge for this project was in developing the appropriate methodology for assessing the cost of capital of a state owned company, limited by guarantee and the incentive issues arising from the company’s financial structure.

CEPA calculated the cost of capital that would be faced by an efficient, conventionally financed (debt and equity) business with comparable assets as Network Rail, referred to as a ‘notional Network Rail’. Following on from this, we looked at the actual cost of debt faced by Network Rail in terms of embedded and new debt, the appropriate fee to pay for the government guarantee (through the Financial Indemnity Mechanism and risks relative to other sectors and within Network Rail itself. An update to the original report was provided in September 2013, with updated market evidence.
 
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