Hello All, Is anyone familiar with the formulas that regulators use to determine a utility's profits? eg: water, electricity. Also Netlink trust around end 2023.

I'm looking at a utility company (CKI HK:1038) which is having its price reset this year with higher cost-of-equity and WACC - see

slide 10. Can I estimate what effect would this have on profits?

First, the basics. Do I understand these terms correctly?

- Cost-of-equity is the return the shareholders should get on their shares.

- WACC is the average cost of capital for the new utility company: this averages the costs of both debt

AND equity.

To calculate WACC, you must assume a particular allocation between debt and equity

eg: If half the capital was debt (eg: interest rate of 1%) and half equity (cost-of-equity of 3%), then WACC is 2%

Second, an example. The best example I can google is rate-of-return regulation (

p6). Roughly:

1) Calculate the base capital (original amount invested). eg: 1 million dollars

2) Apply the WACC to that. eg: At 2%, we need a return of 20k to both cover interest and give a return to shareholders.

3) Add annual operating expenses. eg: 30k per year. Plus depreciation. eg: 50k per year.

So our company needs 100k

revenue per year to cover costs and return shareholders their cost-of-equity (3%).

4) That 100k is after tax, add in taxes if they were paid. eg: If tax rate is 20%, we need 120k revenue per year.

This 120k is the final 'required revenue'. It is divided by the expected number of customers, and appears on our utility bills.

Is this correct so far?