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Financial modelling

What it is:

Undertaking financial modelling for regulators or regulated utilities to determine allowed revenues, assess financeability and/or set tariffs.

Types of studies:

We can build, extend and audit financial models to calculate allowed revenues at price controls, estimate cash flows to calculate financial ratios to inform financeability assessment, and set tariffs that comply with price limits.

These types of study might involve:

Indexation — consideration of the way in which inflation indexation is applied within the model, including changes in indices between price controls. Our price controls expertise is presented in more detail here.

Operating, capital and total expenditure — the treatment of opex, and revenues arising from the rolling retention of efficiency savings (if such an incentive scheme is in place); the treatment of capex; and the use of totex by some regulators.

Incentives — treatment of revenues associated with incentive schemes built into the price control (including menus, incentives for cost efficiency and incentives for delivering outcomes).

Regulatory asset base — the way in which the regulatory asset base is rolled forward, taking account of inflation indexation (if a real cost of capital is used), depreciation, new capex, and any adjustments relating to historic capex.

Depreciation and returns — the calculation of depreciation of assets in the regulatory asset base according to the most appropriate depreciation profile and asset lives.

Cost of capital —applying the appropriate cost of capital, and assessing the costs of financing working capital requirements, where appropriate. Our cost of capital expertise is presented in more detail here.

Financeability — the way in which the model calculates the financial ratios (which are used by credit rating agencies to assess credit-worthiness).

Cost drivers — considering the way in which any cost drivers are used to develop tariffs for different customer groups in the model.

Our Experts

Our in-house team in this field includes John Spicer and Stephen Topping.

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