The WACC-model
The level of the regulatory rate of return is decided by a weighted average cost of capital model (WACC).
Where,
G = Gearing (Debt share of total capital): 0.6
Rf = Real risk free rate for equity: 1.5 %
Infl = Moving average of 4 years inflation, observations from previous year and the current year, and expected inflation for the next two years
βe = Equity beta: 0.875, estimated from an asset beta of 0.35
MP = Market premium: 5 %
Swap = Nominal rate for debt: Annual average of 5-years swap rate
Pd = Debt premium: Annual average of credit spread for 5-year bonds for the power sector
t = Tax rate: 22 %
The main principles for the economic regulation are defined through the Energy Act Regulation, where it is stated that revenue caps shall be determined annually and that the income over time shall cover network costs and give a reasonable rate of return on invested capital – provided that the network is managed, utilized and developed efficiently. The reasonable rate of return is defined by a WACC-model, which is defined in the regulation (§ 8-3) https://lovdata.no/dokument/SF/forskrift/1999-03-11-302.
You can find historical and updated values on the WACC and the different parameters on our Norwegian web page.