A Cost of Capital and Capital Markets Primer for Utility Regulators

May 2020 – With the support of the United States Agency for International Development (USAID) – Energy Division, Office of Energy & Infrastructure, the National Association of Regulatory Utility Commissioners (NARUC) has undertaken the task of developing a Cost Reflective Tariff Toolkit.

The toolkit is intended to constitute several short practical primers that can be used by utility service regulators in countries with emerging economies to design rates that are based on actual cost of service and to effectively engage the public and key stakeholders in the decision-making process.

The third component of our Tariff Toolkit, this primer is a guide to helping utility regulators around the world understand the capital markets and estimate the cost of capital, which is one of the elements of effective cost-based ratemaking and developing cost-reflective tariffs.

Developed by NARUC and authored by John D. Quackenbush, CFA, President of JQ Resources, LLC and former Michigan PSC Chairman, the primer describes capital markets and a set of pathways that regulators in countries with emerging economies may want to consider when estimating the cost of capital for use to determine the utility revenue requirement in ratemaking. 

This set of pathways is based on U.S. utility regulators’ practices in estimating the cost of capital. Furthermore, the pathways include some observations to incorporate regional differences between the U.S. and countries with emerging economies.

"A Cost of Capital and Capital Markets Primer for Utility Regulators" can be found here.