Subsidiaries' capital costs: a compromise approach

Journal Article · Thu Jun 23 04:00:00 EDT 1977 · Public Util. Fortn.; (United States)

OSTI ID:7220976

Fitzpatrick, D B

The question of how regulators should determine the cost of capital of a public utility owned by a holding company is discussed. Three past approaches are examined, and their basic conceptual flaws are pointed out. In brief, the use of the parent company's capital costs and capital structure as a surrogate for an individual subsidiary's capital costs is inappropriate since such a procedure ignores the premise that risk differentials between subsidiaries should be compensated with different equity returns to the individual subsidiaries. Blindly using the distinct capital structures of individual subsidiaries may also lead to misleading results since parent companies have the ability to create abnormal capital structures for their subsidiaries. Finally, the ''double leverage'' approach is theoretically in error since its use is dependent on the financial characteristics of the utility investors and is unfair to corporate investors because such investors may have considerable leverage in their own capital structures. The author then discusses the ''adjusted capital cost'' method to correct the principal deficiencies of the more traditional approaches. (MCW)

• Research Organization: Boise State Univ., ID
• OSTI ID: 7220976
• Journal Information: Public Util. Fortn.; (United States), Journal Name: Public Util. Fortn.; (United States) Vol. 99:13; ISSN PUFNA
• Country of Publication: United States
• Language: English

Related Subjects

29 ENERGY PLANNING, POLICY, AND ECONOMY
290200* -- Energy Planning & Policy-- Economics & Sociology
293000 -- Energy Planning & Policy-- Policy
Legislation
& Regulation
ACCOUNTING
CAPITAL
CHARGES
ECONOMICS
ELECTRIC POWER
MANAGEMENT
POWER
PUBLIC UTILITIES
REGULATIONS