The Cost of Capital in Regulated Firms: The Argentine Experience
AbstractThe sustainability of service is one of the fundamental aims of any regulatory system, and this tends to be reflected in the general principles within the legal framework of each public service. The necessity to cover economic costs of service then follows, in order to cover costs in such a way as to guarantee the maintaining and continuity of the system as well as its expansion. These economic costs should necessarily include sufficient retribution for the capital used by investors: the cost of capital. In the case of Argentine regulation, it is usual practice to use an adapted form of the CAPM (Capital Asset Pricing Model) to calculate the opportunity cost of equity, in such a way as to take the country risk into account. In this work we will analyse the components of the adapted formula for the cost of capital, discussing incentives which generate each of the possible outcomes for the regulated firms. Finally, we will present a model of dynamic optimisation for a regulated firm in a country such as Argentina.
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Bibliographic InfoPaper provided by Instituto de Economía, Universidad Argentina de la Empresa in its series UADE Working Papers with number 8_2000.
Length: 40 pages
Date of creation: 01 May 2000
Date of revision:
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Web page: http://www.uade.edu.ar/paginas/InstEconomiaIDE.aspx
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regulatory system; public service; CAPM; country risk;
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