Cost of capital to a public utility

Thesis/Dissertation · Sat Jan 01 04:00:00 EST 1983

OSTI ID:6588841

Pflaum, Jr, C C

This dissertation examines the effects of market structure, regulatory climate, capital intensity, and financial leverage on the cost of equity to a regulated utility. A theoretical model is developed that recognizes that regulation sets margin per unit of output, not price. This model is used to examine the theoretical effects of the variables mentioned above. Four major findings are reported: 1) covariance of return can be reformulated into an expression explicitly recognizing the price and income elasticities of demand of the various consumer groups; 2) the proper measure of the effect of a capital intensity is fixed costs as a fraction of the market value of the firm's equity not the classic measures of operating leverage; 3) the effect of financial leverage on the cost of equity is different, and smaller, than that represented by models developed previously; and 4) the cost of equity to a public utility is nonlinear with respect to the leverage ratio. Empirical verification of the effects posited by the theoretical models is attempted using linear regression. Some of the theoretical relationships predicted by both classical models of cost of capital and that developed in the dissertation are found to be insignificant or reversed in the empirical results. Several explanations for this empirical result are presented. It is suggested that managerial responses to regulatory behavior distort many of the relationships predicted by the model under the assumption of politically neutral regulation. It is also noted that the use of multi-part tariff structures for industrial customers greatly reduces the risk associated with serving them.

• OSTI ID: 6588841
• Country of Publication: United States
• Language: English

Related Subjects

29 ENERGY PLANNING, POLICY, AND ECONOMY
290200* -- Energy Planning & Policy-- Economics & Sociology
CAPITAL
COST
MARKET
MATHEMATICAL MODELS
PUBLIC UTILITIES
REGULATIONS