Discussion Paper - Adjusting for expected inflation in deriving the cost of capital - February 2009

In its pricing determinations, IPART uses a real rate of return to determine the cost of capital allowance of its building blocks model. This cost of capital allowance forms a substantial part of the annual revenue requirement of utilities. IPART is currently reviewing how it adjusts for expected inflation in deriving the cost of capital. This discussion paper considers a new methodology that can be used to adjust the cost of capital for inflation using the Australian zero coupon inflation-indexed bond market.