Original scientific paper
A Comprehensive Approach to Regulation of Natural Monopolies – Setting a Fair Rate of Return
Ivo Družić
; University of Zagreb, Faculty of Economics and Business Zagreb, Zagreb, Croatia
Ivona Štritof
; Croatian Energy Regulatory Agency, Zagreb, Croatia
Tomislav Gelo
; University of Zagreb, Faculty of Economics and Business Zagreb, Zagreb, Croatia
Abstract
One of the main questions, when designing the principles of the rate of return regulatory
method, is “what is a fair rate of return”. This question is important since a fair rate of
return is essential for sustaining a fi nancial stability of regulated companies and securing
prudential new network investments. This paper tackles a problem of setting a fair rate of
return in case of Croatia for four monopoly network activities, transmission and distribution
in electricity and gas sector. A method used for setting a rate of return as defi ned in the
regulatory sub-laws is a weighted average cost of capital (WACC). The goal of this paper is
twofold: i) to validate the methodology prescribed by the regulator having in mind that the
national economic, fi nancial and regulatory environment has not yet reached its maturity,
thus hindering consistent estimation of particular WACC parameters and ii) to analyze the
results obtained for WACC. The fi ndings of research indicate that signifi cant improvements
should be made concerning the overall regulatory policy and defi ned methodological
approach.
Keywords
Hrčak ID:
85786
URI
Publication date:
1.5.2012.
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