The Role of the Regulatory Asset Base as an Instrument of Regulatory Commitment

Abstract

This paper discusses the emergence and evolution of the regulatory asset base (RAB) as a key aspect of infrastructure industry regulation in the UK and other countries. In Britain, the RAB emerged during the 1990s after privatization of the main network infrastructure industries. It was initially developed for the England and Wales water industry, but its use spread to UK energy (primarily networks), to railway networks and to the fixed line telecom network. A key feature of the RAB is that it nowhere appears in primary legislation. The paper discusses and presents evidence that the most important feature of the RAB is the process by which the RAB is reassessed and revised and that this provides considerable evidence on the consistency and transparency of regulatory regimes. The quality of this process varies considerably by country and these differences seem to be reflected in ratings agency judgments and share price movements. In the UK, Australia and some other countries, the RAB model has provided a considerable degree of protection against retrospective ‘asset taking’ without imposing the rigidities of the full US ‘rate base’ model.