Abstract
The objective of providing inducements for public utilities to seek to improve the efficiency of their operations has been a longstanding regulatory concern. Among the evolving strategies for furthering that objective is a shift toward what has come to be referred to as “incentive” regulation. We examine here how this departure from past regulatory practice will affect the market value and market risk of the utility firm, and the specific manner in which an incentive mechanism can be implemented in order to achieve a desired valuation outcome. A particular focus is the establishment of boundaries on allowed rates of return under incentive regulation which are consistent with that desired outcome. The likely impact on utility ratepayers is considered.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Acton, J. and I. Vogelsang, 1989, Introduction to the symposium on price cap regulation,Rand Journal of Economics 20 (Autumn), 369–72.
Ahn, C. and H. Thompson, 1989, An analysis of some aspects of regulatory risk and the required rate of return for public utilities,Journal of Regulatory Economics 1 (September), 241–57.
Averch, H. and L. Johnson, 1962, Behavior of the firm under regulatory constraint,American Economic Review 52 (December), 1052–69.
Baumol, W. and A. Klevorick, 1970, Input choices and rate of return regulation: An overview of the discussion,Bell Journal of Economics and Management Science 1 (Autumn), 162–90.
Beesley, M. and S. Littlechild, 1989, The regulation of privatized monopolies in the UK,Rand Journal of Economics 20 (Autumn), 454–72.
Bey, R., 1983, Market model stationarity of individual public utilities,Journal of Financial and Quantitative Analysis 18 (March), 67–86.
Blume, M., 1971, On the assessment of risk,Journal of Finance 26 (March), 1–10.
Bos, T. and P. Newbold, 1984, An empirical investigation of the possibility of stochastic systematic risk in the market model,Journal of Business 57 (January), 35–41.
Braeutigam, R. and J. Panzar, 1989, Diversification incentives under price-based and cost-based regulation,Rand Journal of Economics 20 (Autumn), 373–91.
Brennan, M. and E. Schwartz, 1982, Consistent regulatory policy under uncertainty,Bell Journal of Economics 13 (Autumn), 506–21.
Brigham, E. and R. Drum, 1977, On the use of the CAPM in public utility rate cases,Financial Management 6 (Summer), 7–15.
Chen, C., 1982, Time series analysis of beta stationarity and its determinants: A case of public utilities,Financial Management 11 (Autumn), 64–71.
Collins, D., J. Ledolter, and J. Rayburn, 1987, Some further evidence on the stochastic properties of systematic risk,Journal of Business 60 (July), 425–48.
Cox, J., J. Ingersoll, and S. Ross, 1985, An intertemporal general equilibrium model of asset prices,Econometrica 53 (March), 363–84.
Davis, B. and F. Sparrow, 1972, Valuation models in regulation,Bell Journal of Economics and Management Science 3 (Autumn), 544–67.
Dudak, J., D. Furman, and J. Kubacki, 1990, Reforming electric power through competition and incentives,Public Utilities Fortnightly 125 (April 26), 13–18.
Fabozzi, F. and J. Francis, 1978, Beta as a random coefficient,Journal of Financial and Quantitative Analysis 13 (March), 101–16.
Face, H., 1988, The first case study in telecommunications social contracts,Public Utilities Fortnightly 121 (April 28), 27–31.
Garbade, K. and J. Rentzler, 1981, Testing the hypothesis of beta stationarity,International Economic Review 22 (October), 578–87.
Gilster, J. and C. Linke, 1978, More on the estimation of beta for public utilities: Biases resulting from structural shifts in true beta,Financial Management 7 (Autumn), 60–65.
Gombola, M. and D. Kahl, 1990, Time series processes of utility betas: Implications for forecasting systematic risk,Financial Management 19 (Autumn), 84–93.
Hayes, B. and D. Siegel, 1986, Rate of return regulation with price flexibility,Journal of Business 59 (October), 537–553.
Kahn, A., 1990, Telecommunications, competitiveness, and economic development-what makes us competitive?,Public Utilities Fortnightly 126 (September 13), 13–19.
Lewis, T. and D. Sappington, 1989, Linking price cap and rate of return regulation,Rand Journal of Economics 20 (Autumn), 405–16. (February).
Mathios, A. and R. Rogers, 1989, The impact of alternative forms of state regulation of AT&T on direct dial long distance telephone rates,Rand Journal of Economics 20 (Autumn), 437–53.
Merton, R., 1973, An intertemporal capital asset pricing model,Econometrica 41 (September), 867–88.
Myers, S., 1972, The application of finance theory to public utility ratecases,Bell Journal of Economics and Management Science 3 (Spring), 58–97.
Patrick, D., 1987, Long distance carrier service: Other modes of regulation,Public Utilities Fortnightly 119 (March 5), 11–15. (forthcoming).
Sibley, D., 1989, Asymmetric information, incentives, and price cap regulation,Rand Journal of Economics 20 (Autumn), 392–404.
Thompson, H., 1988, On the regulatory usefulness of predicting beta: A theoretical analysis, Working Paper, Graduate School of Business, University of Wisconsin.
Thompson, H., 1992, Price cap regulation, incentives for cost reduction and stockholder-ratepayer conflicts, Working Paper, Graduate School of Business, University of Wisconsin.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Lewellen, W.G., Mauer, D.C. Public utility valuation and risk under incentive regulation. J Regul Econ 5, 263–287 (1993). https://doi.org/10.1007/BF01065954
Issue Date:
DOI: https://doi.org/10.1007/BF01065954