engleski

A comprehensive approach to regulation of natural monopolies – setting a fair rate of return

One of the main questions, when designing the principles of the rate of return regulatory method, is “what is a fair rate of return”. This question is important since a fair rate of return is essential for sustaining a financial stability of regulated companies and securing prudential new network investments. This paper tackles a problem of setting a fair rate of return in case of Croatia for four monopoly network activities, transmission and distribution in electricity and gas sector. A method used for setting a rate of return as defined in the regulatory sub-laws is a weighted average cost of capital (WACC). The goal of this paper is twofold: i) to validate the methodology prescribed by the regulator having in mind that the national economic, financial and regulatory environment has not yet reached its maturity, thus hindering consistent estimation of particular WACC parameters and ii) to analyze the results obtained for WACC. The findings of research indicate that significant improvements should be made concerning the overall regulatory policy and defined methodological approach.

monopoly; regulation; WACC

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