Ofcom’s approach to risk in the assessment of the cost of capital - second consultation

This statement sets out Ofcom’s views on a number of issues relating to risk and return, in particular the returns appropriate for companies regulated by Ofcom.

It marks the conclusion to two Ofcom consultations:

• Ofcom’s approach to risk in the assessment of the cost of capital, 26 January 2005 – “the first consultation”; and
• Ofcom’s approach to risk in the assessment of the cost of capital (PDF, 202.7 KB), 23 June 2005 - “the second consultation”

This statement focuses on Ofcom’s approach to estimating companies’ weighted average cost of capital and discusses Ofcom’s regulatory approach to real options. These factors can directly affect financial outcomes for firms in the communications industry, being a key input used by Ofcom in its analysis relating to, for example:

• ex ante duties, such as setting charge controls and price caps;
• ex post duties, such as conducting competition analysis, when considering stakeholder complaints relating to allegations of anticompetitive conduct; and
• valuing the future cash flows that are associated with, for example, licence applications.

Estimating a reasonable rate of return is therefore a key part of Ofcom’s duties in regulating the communications industry, and the financial implications for the firms concerned may be significant.