Having an accurate assessment of the cost of capital is a vital component of many economic decisions, from assessing whether excessive profits have been made in a competition case, to considering the viability of an investment project, to valuing a party to a merger, to controlling the profitability of companies subject to price-cap regulation.
We have an extremely strong track record in this area.
In the UK we have been used by many of the economic regulators in the largest and most high-profile cost of capital analyses as part of their price reviews in recent years. Examples of areas where we have advised on the cost of capital in the UK include the national air traffic control service (on behalf of the Civil Aviation Authority) in 2009-2010; the water sector (Ofwat) in 2008-2010; the London Airports (Civil Aviation Authority) in 2007-2009; BT (Ofcom) in 2005; and UK transmission (Ofcom) in 2005.
We also have strong international experience, having worked on cost of capital as part of price reviews for regulators such as Ficora (Finland), the CER (Ireland) and Agcom (Italy).
In addition to providing our advice within price reviews, we have also advised on many other technical questions relating to the cost of capital. For example, one of our team (Andrew Lilico) was the lead author of Ofcom’s 2005 statement concerning the use of real options in price regulation; another (Stephen Topping) assisted the OFT in assessing the profitability of the pharmaceuticals industry; we advised the CAA on the impact on the cost of capital of market perceptions of implicit bailout promises and consequent effects on incentives to over-gear; we advised the Financial Services Authority on the impact of the Markets in Financial Instruments Directive (MiFID) on the UK’s cost of capital; similarly, we advised the European Parliament concerning the impact of the Financial Services Action Plan and the AIFM Directive.
Our in-house team in this field includes Andrew Lilico and Stephen Topping.