Commentaries

Tradeable RABs and the Split Cost of Capital

3rd January 2008 commentary

Whilst regulators have resisted the
concept of the split cost of capital,
financial markets have been applying its
logic with enthusiasm. The recent
takeover of Norweb with a reported 45%
premium to the regulated capital value
(RCV) takes the application of the idea
one stage further, since, in the Norweb
case, the operational contract was kept
with United Utilities, so that it was the
core regulated asset base (RAB) that was
purchased. In effect, this was yet one
more example of large-scale financial
arbitrage between the weighted average
cost of capital (WACC), which is used to
calculate the allowed rate of return, and
the marginal cost of debt in respect of
the RAB.