News

citefactor-journal-indexing

ADJUSTING COST OF CAPITAL FOR RISKY ASSETS NOT IN THE RATE BASE

This paper identifies an underappreciated source of risk for capital invested in regulated markets and proposes a new methodology to calculate the associated premium. The risk stems from the impact on the revenues and costs of regulated companies of fully depreciated assets that are still in service, but are no longer included in their rate base. The future of many regulated sectors depends on their ability to attract private investment, which will not materialize if investors are not adequately compensated for bearing that type of risk. We develop three models, one based on financial analysis and two on economic analysis, to calculate the proper rate of return on a fully depreciated plant still in service. T he financial model builds upon the intuition that this problem is similar to that of determining the appropriate return on risky ventures that do not require capital expenditure. The economic model is based on the idea of opportunity cost. Shareholders of a regulated company have two options: They can either keep the fully depreciated plant in service or replace it with new plant. The regulatory revenue the company is allowed to earn should make shareholders indifferent between the options of replacing or not replacing the fully depreciated assets. The three models generate the same return on capital for investors.



Real Time Impact Factor: Pending

Author Name:

URL: View PDF

Keywords: Fully Depreciated Assets, Opportunity Cost, Rate Base, Return on Capital, Risk.

ISSN: 2205-6033

EISSN:

Add Citation Views: 1














Search


Advance Search

Get Eoi for your journal/conference/thesis paper.

Note: Get EOI for Journal/Conference/ Thesis paper.
(contact: eoi@citefactor.org).

citefactor-paper-indexing

Share With Us












Directory Indexing of International Research Journals