Finance and financial modelling

Regulation requires the application of several aspects of finance theory, as well as the ability to create detailed financial models. For example, within a price control review, estimates of the cost of capital are required to determine the returns that an efficient company should be able to earn on its regulatory asset base whilst a financial model is needed to pull together the elements of the regulatory framework to arrive at a final price cap.

We have undertaken detailed work in this area for a number of clients. For example, during a series of price reviews we have advised companies in the water, telecoms and energy sectors on a wide range of issues relating to the cost of capital including the cost of equity and debt, the optimal capital structure, whether there should be a small-company premium and the treatment of taxation. For the Irish Commission for Aviation Regulation we created a regulatory financial model to assist the commission with the setting of price caps for aviation terminal services charges levied on airlines by the Irish air traffic control body. We have also designed a regulatory model for UK water and sewerage companies to monitor outcomes against the regulator's forecasts and assess the consequences for the next periodic review.