Assessing the allowed return for the Q6 Airports price control

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Client British Airways (BA)
Dates 2014
Sector(s)Transport
Service(s)Policy & Economics, Regulation & Competition
CEPA provided ongoing support to British Airways (BA) in assessing the Weighted Average Cost of Capital (WACC) that should be allowed at Heathrow and Gatwick airports in forming the Q6 Price Control review of the London airports, which began in April 2014.

Phase 1 of the project involved considering alternative approaches to the allowed return that is currently used by CAA. The key objective in this work was to determine whether an alternative approach would be better placed than the existing regime to determine the returns to be earned by BAA. Different approaches considered included using the existing CAPM approach but providing alternative ways of capturing differences in risk across activities undertaken by the airport; using the existing CAPM approach but providing alternative ways of capturing differences in risk across activities commenced/funded at different times; and considering alternative approaches to CAPM.

In Phase 2 of the project, CEPA focused on the appropriate level of WACC. As part of this phase, CEPA looked at the potential benefits of cost of debt indexation, the appropriate point estimate within the cost of capital range and the individual parameter values across both airports. CEPA publications prior to Initial Proposals and in response to both Initial and Final Proposals have been published by the CAA. The topics contained within responses to these proposals include the impact of inflation assumptions on the allowance, averaging periods used in utilising market evidence and the impact of systematic risks on the beta term.
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