Tradeable RABs and the split cost of capital

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.

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