202 Utility regulation in competitive markets CHAIRMAN’S COMMENTS Philip Fletcher I agree with a great deal of what Julian says. What I want to do is to oﬀer some thoughts, sticking to my own last, and oﬀer a few examples and expansions on some of the points that he makes. Some of the issues faced by Ofwat are, to a greater or lesser extent, relevant also in other parts of the utility regulation ﬁeld. We can all agree, to start with, that setting the cost of capital for regulated industries is not, at least any longer, a precise science. CAPM does not provide the ﬁrm foundation which regulators would like to see. It compares with Winston Churchill’s view of democracy: the worst form of government except for all the others. We do not have a magic wand, Holy Grail Julian called it, to look to. It is extremely helpful to have the developing work around Fama–French, and a series of other issues. I agree with Julian that no regulator should rely on one approach, certainly not the CAPM on recent evidence. But the track record of the other possible models is still relatively short, and therefore I go with him completely in saying you should look across the board at various diﬀerent approaches. So where does that leave an unfortunate regulator? For Ofwat in 2004, it left us facing the need to enable water companies to ﬁnance another very large capital programme – another, that is after...
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