Using CAPM to regulate infrastructure: A critique

CAPM: a 1960s relic still steering today’s £200 bn UK infrastructure.

Regulators continue to fix allowed returns with the Capital Asset Pricing Model, yet this paper shows the model’s neat, single-beta world sits uneasily with modern markets. CAPM’s assumptions of perfect efficiency and fully diversified investors no longer hold; in practice the model persistently understates the cost of capital for “low-beta” utilities, skewing incentives for investment and ultimately raising long-run costs for consumers. Drawing on empirical evidence, Vallorii argues for supplementing CAPM with a transparent, multi-factor cross-check—capturing macro, policy and climate risks—to bring regulation closer to economic reality and unlock the scale of investment the government’s ten-year strategy demands.