shift from A to B will cause the BEE to experience either a one-off gain of $5b or a one-off loss of $2b with equal likelihood. Suppose further that the probability of a regime change is 60%. In this case, the expected gain to the BEE from this regulatory policy would be $0.9b as follows: Since the NPV = 0 principle is a formalization of the legal requirement to allow returns that are commensurate with the costs of a BEE, this policy of immediately adopting a new regime regardless of whether the one-off impact was favourable to the BEE would still violate the legal requirement. In summary, immediately adopting a new regime only when the one-off effect is favourable to the BEE but not otherwise would necessarily violate the NPV = 0 principle. Alternatively, the policy of immediately adopting a new regime regardless of whether the one-off impact was favourable or unfavourable would expose the BEE to a of the with potentially ‘roll dice’, very adverse effects, thereby discouraging investment. It would also expose the BEE to the possibility of an adverse shock so large as to threaten its financial viability, which would lead to either regulatory relief in such cases (and hence violation of the NPV = 0 principle) or the possibility of a supply disruption. In addition, even if the policy of immediately adopting a regime change regardless of the one-off impact on the BEE were rigorously followed, the upside and downside from this policy might not be symmetric, in which case the NPV = 0 principle would still be violated. These disadvantages are all so substantial that the only viable regulatory policy would be to neutralize the one-off effects of regime changes, possibly through a transitional regime, or at least to do so when the one-off effects in either direction are substantial. I now apply this policy to the present situation. 8.4 Regime Changes and the Base Rate In some cases, a new regime may warrant a change in behavior by the BEE and it may also be temporarily left with costs arising from its behavior under the previous regime. Consequently, immediate application of the new regime would produce a temporary and possibly significant deviation between the allowed cost of debt under the new regime and that incurred by a BEE. Thus, rather than immediate application of the new regime, a better
shift from A to B will cause the BEE to experience either a one-off gain of $5b or a one-off loss of $2b with equal likelihood. Suppose further that the probability of a regime change is 60%. In this case, the expected gain to the BEE from this regulatory policy would be $0.9b as follows: Since the NPV = 0 principle is a formalization of the legal requirement to allow returns that are commensurate with the costs of a BEE, this policy of immediately adopting a new regime regardless of whether the one-off impact was favourable to the BEE would still violate the legal requirement. In summary, immediately adopting a new regime only when the one-off effect is favourable to the BEE but not otherwise would necessarily violate the NPV = 0 principle. Alternatively, the policy of immediately adopting a new regime regardless of whether the one-off impact was favourable or unfavourable would expose the BEE to a ‘roll of the dice’, with potentially very adverse effects, thereby discouraging investment. It would also expose the BEE to the possibility of an adverse shock so large as to threaten its financial viability, which would lead to either regulatory relief in such cases (and hence violation of the NPV = 0 principle) or the possibility of a supply disruption. In addition, even if the policy of immediately adopting a regime change regardless of the one-off impact on the BEE were rigorously followed, the upside and downside from this policy might not be symmetric, in which case the NPV = 0 principle would still be violated. These disadvantages are all so substantial that the only viable regulatory policy would be to neutralize the one-off effects of regime changes, possibly through a transitional regime, or at least to do so when the one-off effects in either direction are substantial. I now apply this policy to the present situation. 8.4 Regime Changes and the Base Rate In some cases, a new regime may warrant a change in behavior by the BEE and it may also be temporarily left with costs arising from its behavior under the previous regime. Consequently, immediate application of the new regime would produce a temporary and possibly significant deviation between the allowed cost of debt under the new regime and that incurred by a BEE. Thus, rather than immediate application of the new regime, a better