Empirical study of the relationships between financial leverage and capital costs for electric utilities

Thesis/Dissertation · Thu Jan 01 04:00:00 EST 1987

OSTI ID:5008764

Gapenski, L C

A major element in utility regulation is the setting of just and reasonable allowed rates of return. This rate is a weighted average of the costs of the types of capital employed by the firm, and the weights should reflect the firm's target capital structure. The information required to set the target, or optimal, capital structure includes the relationships between the component costs of capital and the amount of financial leverage used. The primary objective of this study is to empirically estimate the relationships between financial leverage and the costs of common equity and debt for electric utilities. Two different approaches were used to estimate the relationships. First, an econometric model was developed with the component cost as the dependent variable and leverage as the independent variable. Other factors were included as independent variables to account for nonconstant business risk. Second, a model was developed using the bond-rating guidelines and bond yields reported by Standard and Poor's Corporation. The data set consisted of about 73 electric utilities for 1983 and 1984. The results indicated a strong positive relationship between financial leverage and the costs of debt and equity.

• Research Organization: Florida Univ., Gainesville (USA)
• OSTI ID: 5008764
• Country of Publication: United States
• Language: English

Related Subjects

29 ENERGY PLANNING, POLICY, AND ECONOMY
290200 -- Energy Planning & Policy-- Economics & Sociology
296000* -- Energy Planning & Policy-- Electric Power
CAPITAL
CAPITALIZED COST
COST
ECONOMETRICS
ECONOMIC ANALYSIS
ECONOMICS
ELECTRIC UTILITIES
FINANCING
INCOME
PUBLIC UTILITIES
RISK ASSESSMENT