Stable Total Market Return or Stable Equity Risk Premium?
Economic regulators in the UK are revisiting their framework for setting the cost of capital allowance across infrastructure sectors, against a backdrop of rising customer bills and the need to sustain historically high levels of infrastructure investment. But underpinning that debate is a more fundamental problem: the underlying evidence is often inconclusive, and long-run data cannot reliably discriminate between competing models. Regulators risk chasing a false precision the numbers don’t actually support. In an independent discussion paper, Flint Specialist Partner Craig Lonie sets out a framework for exercising regulatory judgement under this kind of uncertainty. By bringing together historical evidence, contemporary market evidence and theoretical coherence, the paper argues that robust decisions emerge not from reliance on any single methodology, but from the disciplined synthesis of independent perspectives. This has relevance beyond the cost of capital, to a range of other decisions where regulators are required to exercise judgement on incomplete evidence.
