Free CFA Level III: Private Markets Infrastructure Practice Questions

B is correct. The Meridian Transmission Link has not yet been built. Construction would run about three years, an equity commitment of $310 million would be outstanding with no distributions expected before commissioning, the developer has not built a line of this length before, and the contractor wants liquidated damages capped at 15% of contract value. Those features define a greenfield exposure: the investor is paid for taking completion, cost-overrun and schedule risk, and the return profile is back-loaded rather than income-producing from the outset. The asset itself carries electricity from an offshore wind zone to the regional grid, which is economic infrastructure serving commercial activity, in contrast to the Northgate school buildings, which deliver a community service and are therefore social infrastructure. After commissioning, the tariff is availability based and independent of the volume of power transmitted, so demand risk is not the dominant exposure either before or after energization.

C is correct. Sorby's second objective is that revenues keep pace with consumer price inflation. Vela's entire output is pre-sold for 20 years at a fixed $41.50 per MWh with no escalation clause, so its revenue line is fixed in nominal terms; if inflation runs above forecast, operating and maintenance costs rise while the contracted price does not, and the real value of each distribution erodes over the contract term. The other two candidates carry explicit indexation: Northgate's tolls escalate at 100% of CPI, and Adriona's RAB is indexed to CPI each year, so a higher price level raises the return and depreciation building blocks that drive allowed revenue. Long-dated fixed-price offtake converts an infrastructure asset into something closer to a nominal bond, which is the opposite of the inflation-hedging property the plan is buying.

B is correct. The regulator's building-block formula given in the vignette is
$$\text{Allowed revenue} = r \times \text{RAB} + \text{regulatory depreciation} + \text{allowed opex}$$
Under the current determination,
$$0.0420 \times \$900.0 + \$36.0 + \$58.0 = \$37.8 + \$94.0 = \$131.8 \text{ million}$$
With the allowed real return cut to 3.40% and the other blocks unchanged,
$$0.0340 \times \$900.0 + \$36.0 + \$58.0 = \$30.6 + \$94.0 = \$124.6 \text{ million}$$
The reduction is $\$131.8 - \$124.6 = \$7.2$ million, or
$$\frac{\$7.2}{\$131.8} = 0.0546 \approx 5.5\%$$
The 80 bp cut bites only on the return block, so depreciation and operating expenditure cushion the top line; this damping of regulatory resets is what makes a RAB-based utility a comparatively stable holding for a pension plan.