Delivering strong, sustainable regulatory and long-term contracts with good regulatory returns
Returns on our investments
We aim to generate value from our investments by improving the operating performance of our networks, by selecting investments that will provide the best return or, in the case of acquisitions, by selecting businesses where we can obtain synergies for the benefit of our customers and our shareholders.
We measure the value we generate from our investments by our consolidated return on equity.
Our group return on equity measure allows us to monitor our performance in generating value from our businesses and from the investments we make. Return on equity is calculated by dividing our annual return by the equity base. The annual return is our earnings (excluding exceptional items, remeasurements and stranded cost recoveries) plus various regulatory based adjustments. The most significant regulatory adjustments relate to the replacement of IFRS depreciation and capital expenditure with regulatory based treatments, retail price index (RPI) linked UK regulatory asset value indexation uplift, and a pension deficit revenue adjustment. The equity base is invested capital less opening net debt. Invested capital is the opening UK regulatory asset value inflated to mid year based on RPI linked inflation, plus opening US invested capital (excluding stranded cost assets and assets disposed in the year), plus the closing net book value for assets and liabilities of UK based non-regulated businesses, corporate activities and joint ventures. Opening net debt is adjusted for significant individual transactions during the year such as disposal proceeds and share buybacks.
We monitor our performance using a three year average return rather than a return for a specific year. This provides a better measure of our ongoing performance as it helps to reduce short-term fluctuations due to temporary market conditions such as inflation volatility. For 2008/09, our three year average return on equity is 10.8%, down from 11.8% in 2007/08 and 12.0% in 2006/07. Despite an increase in our adjusted earnings during 2008/09, the decrease is primarily driven by UK RPI linked inflation that has reduced the inflation uplift on the regulatory asset value recognised in our return.