Cost of Capital Institute needed to inform regulation

Scottish Power chief executive Keith Anderson has said the idea of creating a body to set the cost of capital across regulated sectors “should be explored”.

The idea was floated by Mark Caines, partner at the Flint Global consultancy, who shared a panel with Anderson at Utility Week’s Investor Summit today (18 March).

The panel discussed the best ways to inspire investor confidence through regulation. There was general consensus this was not currently being achieved, with the appeals to the Competition & Markets Authority (CMA) by water, electricity transmission and gas networks cited as evidence.

Caines expressed the view that “the regulatory system in both energy and water has got exceptionally complex”.

He suggested that one way to simplify the process, at least on the thorny issue of rates of returns, would be to have “an independent regulator” to set them.

He explained: “It wouldn’t set the same rate for each sector but it would provide input into Ofgem, Ofwat, Ofcom, CAA etc as to what the allowed returns should be and that would be used as an input. That has then the scope for allowing that body to take account of the wider considerations about the benefit to the UK of attracting investment into the country.”

His views were echoed by Stuart Cook, managing director of consultancy Complete Strategy, who said the differing approaches of regulators “makes it confusing for investors to come to a common understanding of what their risks are”.

He said: “There is almost competition between the regulators and I worry about this. It’s almost seen as a badge of honour among the regulatory community if you can come up with a lower cost of capital than before. And that drives the wrong types of behaviours.”

He added: “If you look at what’s happened between the Treasury and the Office for Budget Responsibility (OBR) – the reason we have the OBR is to create that independent view on some of the forecasts, to depoliticise some of the decisions.

“I would like to create a Cost of Capital Institute – an independent body that would advise on cost of capital. A bit like the relationship between the OBR and the Treasury, it wouldn’t be for regulators to have to follow. But there would be a strong imperative on them doing so. I think it would encourage greater consistency across the various regulatory communities.”

Anderson said the idea “needs to be explored and it should be explored”.

He said: “There’s almost competition between regulators as to who can be the best baddie in town. But more worrying than that there’s almost a behaviour where the regulator says ‘we’ll give you a bunch of numbers and if you don’t like it, go to the CMA and they’ll sort it’. The CMA are almost becoming, by default, that independent body.

“But the problem with doing it that way is that it’s happening at the end of the process. (An appeal takes up) 18 months of time, cost, effort, resource, investor confidence.

“At a time when we have a government saying go faster, we’re in danger of slowing all the processes down.”