Cross-sectional analysis of utility returns: Regulatory and investor implications

Journal Article · Sat Mar 01 04:00:00 EST 1997 · Electricity Journal

DOI:https://doi.org/10.1016/S1040-6190(97)80350-8· OSTI ID:518442

Claggett, Jr, E T; Moyer, R C

What is the spread between expected and required returns on common equity for electric and combination electric and gas distribution utilities, using the market-to-book value ratio? The authors find that the M/B ratio is negatively associated with such factors as the level of long-term interest rates, and positively associated with the earned return on common equity and operation in a favorable regulatory climate. The relationship between expected and required returns for utilities over time has important implications for potential utility investors. In addition, with the passage of the Energy Policy Act of 1992 and related FERC orders implementing open access to transmission lines, it is increasingly important for investors to understand the potential sources of bias in the regulatory process that may cause utilities to earn subpar or superior returns. The possible downside to earnings is of particular concern as utilities face the prospect of stranded costs arising from the competitive pressures of wholesale and retail wheeling. By enhancing our understanding of the regulatory process and its shortcomings, we may gain insight into how to improve that process in the future. This article provides an analysis of the cross-sectional variation in the spread between the returns expected by investors and required investor returns for electric and combination electric and natural gas distribution utilities during a period of time when utility returns, on average, were at least adequate, relative to investor return requirements (1987-92). The insights developed from our analysis should be of value to utility investors in the new era of increased competition.

• OSTI ID: 518442
• Journal Information: Electricity Journal, Journal Name: Electricity Journal Journal Issue: 2 Vol. 10; ISSN ELEJE4; ISSN 1040-6190
• Country of Publication: United States
• Language: English

Related Subjects

29 ENERGY PLANNING, POLICY, AND ECONOMY
DEREGULATION
ELECTRIC POWER INDUSTRY
FINANCIAL SECURITY
INVESTMENT
PROFITS