Financial economics and regulatory finance

Financial markets are constantly evolving and the financial decisions that firms, regulators and governments make are of growing importance and complexity. Our team of financial and regulatory finance economists apply the latest economic thinking and analytical tools to ensure that our clients make the right calls on these decisions.

We also work closely with our colleagues in corporate finance, deals and the regulatory economics team, to provide leading insights and knowledge from across the PwC network.

Our team has expertise in:

  • Regulatory finance
  • Capital markets investment assumptions and risk premia
  • Financial market structure and policy
  • Bespoke company financial analysis
  • Disputes support and estimation of damages

Important questions we can help clients to answer

Regulators and regulated companies

Growing media scrutiny has increased the importance of achieving the appropriate balance between risk and reward in regulated industries. Our team has extensive experience in working alongside regulators to develop regulatory frameworks in aviation, energy, telecommunications and water.

We can help you to answer important questions such as:

Regulators

  • How do we structure the overall risk/reward package for regulated companies?
  • What is the appropriate level of allowed returns for the industry?
    • How do we estimate forward-looking equity returns?
    • How do we account for firm- or sector-specific risks?
  • How can we develop a financial model capable of estimating regulated prices or revenues, or determining financing needs?

Companies

We also partner with regulated companies to help them prepare for price controls. We can help you to answer important questions such as:

  • What is the company's cost of capital?
  • How do we present a persuasive business plan to the regulator?
  • How can we conduct a robust financeability assessment to meet the requirements of the regulator?
  • What are the potential risks to the firm and how can we robustly assess them?
  • How will financial markets react to our proposed financial approach?

Case studies

Global asset manager

Our client, an investment firm based in Asia, asked us to develop an evidence pack on capital market assumptions (CMAs) covering 17 economies including large global economies and smaller Asian economies, such as Cambodia. They were interested in 14 different long-term investment assumptions including returns and volatilities for government and corporate bonds, equities and alternative assets. Rather than forming a single point estimate, the client wanted the evidence pack to provide a range of points developed using different approaches.

Our work suggests the long-term return outlook across asset classes remains subdued which will put pressure on the long-term savings industry.

Energy company

Following publication of the RIIO-2 Sector Specific methodology consultation, the network companies were required to develop their responses to this framework before submitting their formal Business Plans to Ofgem in December 2019. Our work primarily focused on providing strategic advice to the client on how to conduct their financeability assessment and position their financing plan with Ofgem. Specific tasks included:

  • A financial stakeholder interview programme to gauge the views of investors on proposed regulatory framework as well as the current and future outlook for the utilities sector
  • Calibrating the balance of incentives, including the return adjustment mechanisms
  • Financeability analysis, including financial ratio calculation and credit rating analysis
  • Risk analysis, including Monte Carlo, to assess the financial resilience of the business
  • Financeability review to ensure the client was compliant with the regulator's guidelines

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