Konsultrapport Avkastningsmetoder Elnät Montell och Partners (2024)
Source details
- Type
- Report
- Publisher
- Montell och Partners
- Published
- 2024-12-16
Document: Avkastningsmetoder för nätverksamhet — En rapport till Energimarknadsinspektionen, Montell och Partners AB, 2024-12-16. Commissioned by Ei.
Source type: Consultant report (Ei procurement — analytical input to RP5 regulatory methodology)
Purpose
Ei commissioned Montell och Partners to produce analytical input on two related questions for RP5 (2028–2031) methodology development:
- What methods can be used to calculate a reasonable return on capital for gas and electricity network companies?
- What are the consequences of switching from the current kapacitetsbevarande (replacement cost / forward-looking) capital valuation to a förmögenhetsbevarande (historical cost / backward-looking) valuation?
This report is one of three RP5 methodology inputs commissioned simultaneously — the others being Source - Konsultrapport Return on Investment Elnät DFC Economics (2024) (on the same capital cost question, by former ACER Director Pototschnig) and Source - Konsultrapport Kostnadsincitament Regionnät Termicum (2025) (on efficiency requirements).
Capital valuation methods: key definitions
| Term | Meaning |
|---|---|
| Kapacitetsbevarande | Forward-looking / replacement cost: RAV based on what it would cost to acquire equivalent assets today (nuanskaffningsvärde). Currently used by Ei for electricity networks. |
| Förmögenhetsbevarande | Backward-looking / historical cost: RAV based on actual acquisition costs (possibly indexed to inflation). Currently used by Ei for gas networks; proposed for electricity RP5. |
| Nettonuvärdesneutralitet (NNN) | The principle that the NPV of all regulatory cash flows equals the initial investment — neither over- nor under-remuneration in total. Both kapacitetsbevarande and förmögenhetsbevarande can achieve NNN if correctly implemented. |
Return on capital methods reviewed
The report catalogs 8+ methods for estimating cost of equity:
| Method | Notes |
|---|---|
| CAPM (Capital Asset Pricing Model) | Most widely used; good theoretical foundation; Swedish challenge: small DSO comparables |
| Fama-French Three-Factor Model | Adds size and book-to-market factors to CAPM |
| Fama-French Five-Factor Model | Adds profitability and investment factors |
| Arbitrage Pricing Theory (APT) | Multi-factor; flexible but requires factor selection |
| Dividend Capitalization Model (DDM/DGM) | Based on dividend expectations; circularity risk in regulated contexts |
| Discounted Cash Flow (DCF) | Forward-looking; similar circularity risk |
| Predictive Risk Premium Model (PRPM) | Extension of DDM/DCF adding predictive variables; data availability limited outside the US |
| Risk Premium Model (RPM) | Based on historical data, implied market expectations, and practitioner surveys; simplified variant |
| WACC (Weighted Average Cost of Capital) | Combined equity + debt cost; used by Ei |
| Förenklad WACC (Riskpremiemetoden) | Swedish simplified variant currently used by Ei |
For combined capital cost: standard WACC, simplified WACC (risk premium method), or combinations.
Swedish-specific challenges
Ei’s current CAPM implementation faces four complications specific to Sweden:
-
Ownership structure: Most Swedish DSOs are publicly owned (municipal or state). Municipally-owned companies can access financing on terms tied to the municipality’s own financial standing and risk level rather than the individual company’s — but this is owner-specific, not risk-specific. (The raw does not name a specific lender here — cf. Source - Konsultrapport Return on Investment Elnät DFC Economics (2024), which references an AAA-rated cooperative bank.)
-
Capital structure: Swedish DSOs have very low debt-to-equity ratios compared to EU comparables. Most finance through equity, often due to municipal balance sheet practices.
-
Size: Swedish DSOs are small or very small compared to average EU DSOs. The CAPM’s beta estimation relies on listed comparables that are large international utilities — a poor match.
-
Comparables: Few listed companies meet the bar for relevance — the raw names business-share (el/gas activity exceeding 50% of turnover, per Ei’s practice), ownership structure, and free float as example criteria, without giving Ei’s exact free-float threshold. The relevant European comparable group is small (6–8 companies). (For a specific ≥25% free-float / EU-listing threshold, see Source - Konsultrapport Return on Investment Elnät DFC Economics (2024), which states Ei’s criteria explicitly — that detail belongs to DFC’s report, not this one.) The resulting beta estimates carry high uncertainty.
Key findings on kapacitetsbevarande vs. förmögenhetsbevarande
Both methods can achieve NNN in principle (Preinreich-Lücke theorem, Swoboda, Brennan). The key differences:
| Dimension | Kapacitetsbevarande (current) | Förmögenhetsbevarande (proposed) |
|---|---|---|
| Risk exposure | DSO bears sector-specific inflation risk (if construction costs diverge from consumer price index) | Lower risk — recovery tied to actual investment |
| Revenue profile | Higher early revenues (replacement costs often above historical) | More stable, back-loaded profile |
| Rate of return treatment | Real rate + indexed RAV | Can use nominal rate + unindexed historical RAV (most EU approach) |
| Transition | No change | Requires careful transition management (step change in RAV possible) |
International comparison: France, Italy, Netherlands, UK, Germany, USA, Austria — all reviewed. All bar Germany (which does not use WACC at all) value the capital base on a historical-cost basis (förmögenhetsbevarande). WACC type is mixed, not uniformly nominal: Italy and the UK use real WACC; the Netherlands, Austria, and the USA use nominal (or inflation-adjusted-nominal); France splits by activity — gas networks use real WACC, electricity transmission uses nominal.
Relevance to wiki topics
- Ei: RP5 methodology preparation — this report and the DFC report are the two main analytical inputs on return-on-capital methodology
- Source - Ei Inriktning intäktsramar 2028-2031 (2025): The Inriktning document published Ei’s direction for RP5; this report provides analytical underpinning; confirms the förmögenhetsbevarande direction
- Why Swedish Local Flex Markets Are Thin — Structural Causes / Flexibility Market › The “charity” problem — revenue regulation as participation barrier: The kapacitetsbevarande → förmögenhetsbevarande transition does not directly fix the CAPEX bias in favour of flexibility — that requires the separate TOTEX/lösningsneutralitet reform (ellagen 5 kap 12a§, Ei RP5 incitament). The capital valuation change primarily affects risk exposure and return profiles, not the CAPEX vs. opex incentive asymmetry.