If this approach is implemented, it is argued that regulated businesses should not
be provided with a choice of method of cost of debt estimation. Providing
choices to regulated businesses will result in regulated businesses selecting the
option that leads to highest revenue and not the option that represents efficient
debt financing, and may result in multiple benchmarks, adversely affecting the
firm’s incentive to act efficiently.
This paper has not taken a strong view on whether the benchmark cost of debt
should be estimated using a commercial data provider, or whether regulators
should estimate their own yield curve. This is because each method has its own
advantages and disadvantages and it up to regulators to determine which
benchmark cost of debt method is most appropriate