Last November, KKR Infrastructure and Ontario Teachers’ Pension Plan (OTPP) acquired a 40% stake in Caruna, Finland’s largest electricity distribution network. Our client asked us if we could provide key advice on the Finnish regulatory model ahead of this sale, as they were interested in bidding. We therefore built on our pre-existing understanding of the Finnish regulatory regime to determine whether any major changes had taken place to the regulatory model or sector economic outlook since our work in 2017, providing advice on the sale of Elenia.
Regulatory priorities unlikely to change
We revisited previous analysis, where we broke down the key components of the regulatory model in Finland. We found that despite the start of a new price control period, the regulatory regime endured with only small changes, as it had done through multiple previous price controls.
Despite slightly more focus on affordability, the regulator’s key priorities seemed unlikely to change:
- Large storms in the past decade meant a greater focus had been placed on investment for undergrounding of the electricity network to improve security of supply. This looked set to continue as many companies still had a lot of work to do.
- The regulating Energy Authority (EA) continues with its guiding “one size fits all” principle, which outlines that all operators should be treated equally regardless of size or ownership. When it comes to benchmarking, this principle makes the regime attractive for operators that can achieve efficiencies beyond comparators, and those are likely to be larger operators that benefit from economies of scale.
- The approach to setting the cost of capital, and the key parameters involved in the calculations, were likely to remain in line with historical values and based on established methods.
- We also found that the fundamental approach to calculating regulatory assess values and the allowed return on those assets was unlikely to change, based on infrequent asset revaluations to current estimated replacement cost and a nominal WACC.
Modelling forecasted value
Our advice focussed on applying these regulatory features to Caruna to determine likely future allowed revenues based on business plan assumptions, and interpreting the impact of these on value for our client. We built on our previous knowledge base and modelled the critical value drivers, taking into account both the mechanics of the current system and risks that surround future evolution of the regime. Our client used this analysis and accompanying advice on Caruna’s future value to inform their bid.