The level of the regulatory rate of return is decided by a weighted average cost of capital model (WACC).
G = Gearing (Debt share of total capital): 0.6
Rf = Real risk free rate for equity: 2.5 %
Infl = Moving average of 4 years inflation, observations from previous year and the current year, and expected inflation for the next two years
βe = Equity beta: 0.875, estimated from an asset beta of 0.35
MP = Market premium: 5 %
Swap = Nominal rate for debt: Annual average of 5-years swap rate
Pd = Debt premium: Annual average of credit spread for 5-year bonds for the power sector, minimum rating BBB+
t = Tax rate: 25 %
The main principles for the economic regulation are defined through the Energy Act Regulation, where it is stated that revenue caps shall be determined annually and that the income over time shall cover network costs and give a reasonable rate of return on invested capital – provided that the network is managed, utilized and developed effectively. The reasonable rate of return is defined by a WACC-model, which is defined in the regulation https://lovdata.no/dokument/SF/forskrift/1999-03-11-302.
The WACC-model was changed in 2013. The aim of the new WACC model is to continue with a stable and predictable regulated cost of capital, but at the same time too a larger extent take into account the changes and fluctuations in the financial markets. The adjustments in the WACC-model was due to the unstable markets, and no clear indications of that the current observed levels of parameters would last. The current and future needs for expanding, upgrading and renewing the electricity networks were also a backcloth during the assessment. The changes concerned the risk free rate, the market premium and the debt premium.
For historical and updated values on rate of return, see the Norwegian homepage https://www.nve.no/elmarkedstilsynet-marked-og-monopol/okonomisk-regulering-av-nettselskap/reguleringsmodellen/referanserenten/