The ‘duty to finance’, the cost of capital and the capital structure of regulated utilities: Lessons from the UK

This work assesses the main regulatory responses to the changes in the capital structure of the utilities firms. It examines the different means of influencing the capital structure and the various concerns related to high gearing; particularly in relation to the cost of capital and risk. The paper argues that several of those concerns are unfounded and that the effectiveness of various aspects of the regulation of capital structure and the setting of the cost of capital are highly questionable.

►  There has been a general trend to replace equity with debt in utilities markets – a trend that has prompted a financial reaction from regulators.
►  Many of the alleged evils of high gearing are exaggerated.
►  There is no clear commitment not to bailout firms.