Risk and Return for Regulated Industries - 1st Edition - ISBN: 9780128125878, 9780128125885

Risk and Return for Regulated Industries

1st Edition

eBook ISBN: 9780128125885
Paperback ISBN: 9780128125878
Imprint: Academic Press
Published Date: 19th April 2017
Page Count: 354
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Risk and Return for Regulated Industries provides a much-needed, comprehensive review of how cost of capital risk arises and can be measured, how the special risks regulated industries face affect fair return, and the challenges that regulated industries are likely to face in the future.

Rather than following the trend of broad industry introductions or textbook style reviews of utility finance, it covers the topics of most interest to regulators, regulated companies, regulatory lawyers, and rate-of-return analysts in all countries. Accordingly, the book also includes case studies about various countries and discussions of the lessons international regulatory procedures can offer.

Key Features

  • Presents a unified treatment of the regulatory principles and practices used to assess the required return on capital
  • Addresses current practices before exploring the ways methods play out in practice, including irregularities, shortcomings, and concerns for the future
  • Focuses on developed economies instead of providing a comprehensive global reviews
  • Foreword by Stewart C. Myers


Academics and professionals working on the financial and governance aspects of regulated industries worldwide

Table of Contents

Chapter 1. Motivation: Why a Book Now on the Required Rate of Return?

  • Introduction
  • Why Regulate Prices in the First Place?
  • Why is Determining Reasonable Profits Hard?
  • Plan of the Book

Chapter 2. Legal Foundations and Regulatory Frameworks for a Fair Return

  • Introduction
  • Rate Regulation in the United States
  • The Rate Base
  • Rate Regulation in Canada
  • Rate Regulation in the United Kingdom
  • Rate Regulation Elsewhere
  • Rate Regulation in Developing Economies
  • Interaction of the Regulatory Framework and Cost of Capital

Chapter 3. Financial Asset Pricing Principles

  • Introduction
  • Risk–Return Trade-off
  • What Should We Expect From Models?
  • Selecting a Comparable Sample

Chapter 4. The Capital Asset Pricing Model and Variations

  • Introduction
  • Types of Risk
  • The Original Capital Asset Pricing Model
  • Capital Asset Pricing Model Implementation Issues and Approaches
  • Empirical Challenges to the Capital Asset Pricing Model
  • Summing up the Capital Asset Pricing Model

Chapter 5. Discounted Cash Flow Models

  • Introduction
  • Constant Growth Discounted Cash Flow Model
  • Multistage Discounted Cash Flow Models
  • Discounted Cash Flow Implementation Issues
  • Cautions on the Fundamental Premise of the Discounted Cash Flow Approach
  • Summing Up the DCF Model

Chapter 6. Multifactor and Other Cost of Capital Estimation Models

  • Introduction
  • Risk Premium Model
  • Arbitrage Pricing Theory
  • Fama–French Models
  • Buildup Models
  • Comparable Earnings
  • Conclusion

Chapter 7. Effects of Capital Structure on Cost of Capital

  • Introduction
  • Example of Debt's Effects: Home Mortgages
  • Research on the Effects of Debt on the Cost of Capital
  • Conclusion

Chapter 8. Approaches to Rate Base Measurement

  • Introduction
  • Inflation Affects Competition and Original Cost Regulation Differently
  • Why Does the Tomatoes Theorem Matter?
  • Four Approaches to Regulatory Capital Recovery: The Concepts
  • Additional Implementation Issues for Inflation-Adjusted Approaches
  • Rate Base Methods Outside Canada and the United States
  • Summary of Approaches

Chapter 9. Rate of Return Practices in Use

  • Introduction
  • Practices in the United States
  • Practices in Canada
  • The United Kingdom (Office of Gas and Electricity Markets)
  • The Netherlands (The Autoriteit Consument & Markt)
  • Italy
  • Australia
  • Summary of Approaches to Determining the Rate of Return
  • Why Do Different Places Use Different Methodologies?

Chapter 10. Asymmetric Risk: Theory and Examples

  • Introduction
  • The Cost of Capital Versus the Yield to Maturity on Corporate Bonds
  • Relationship to Regulated Returns
  • Your Questions Answered
  • Potential Remedies
  • Asymmetric Risks in Action
  • Potential Future “Black Swans”
  • Looking Forward

Chapter 11. Emerging Issues and Implications for Cost of Capital

  • Introduction
  • Reflecting System Shocks
  • Alternative Ownership Structures
  • Evolving Utility Business Models
  • Concluding Remarks

Appendix A. Features That Affect Capital Structure

Appendix B. Further Reading on Approaches to Rate Base Measurement


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© Academic Press 2017
Academic Press
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"Risk and Return for Regulated Industries is a must-read for anyone analyzing or working in regulatory finance. The authors’ treatment of the subject matter is both comprehensive and accessible." --John Graham, Duke University

"Every practitioner in this field will find this book an invaluable reference for its up-to-date explanations of rate of return theory and practice.  Its discussion and insights into rate regulation in the U.K., Australia, and New Zealand, along with its discussion of the cost of capital for MLPs and REITs, are particularly relevant in view of the dramatic changes facing the electric industry and the regulators’ drive to change how utilities are incented, and how they make money." --Richard Patterson, Pacific Gas and Electric Company

"This authoritative work comes at a critical time in utility regulation. Rapid changes in technology, markets, and politics are affecting utilities’ ability to raise capital. Continued efficient investment is possible only if utility regulators understand utility finance." --Mark A. Jamison, University of Florida

"This volume enables us to use cross-comparisons to provide greater insight into rate and risk issues of our own industries.  I look forward to using it to probe financing issues of the water and civil infrastructure sectors." --Neil S. Grigg, Colorado State University

"Risk and Return for Regulated Industries provides comprehensive coverage of the models and methods used for one of the most difficult steps in the determination of government-regulated prices: the estimation of cost of capital. The text is well-grounded in finance theory, but its strength is the focus on practical application of these estimation methods and the international examples from which we all may learn." --Larry Blank, New Mexico State University

"Traditional public utility economics seemed to be on its way to becoming a subject for the history of economic thought. Risk and Rate of Return for Regulated Industries demonstrates that, far from disappearing, the issues are increasingly important today as public-private-partnerships blur the lines between regulation and public production. This volume is a comprehensive restatement and updating of the issues of rate base determination and the calculation of the cost of capital, with an emphasis on incorporating issues of risk. It belongs on the shelf for any student of twenty-first century price regulation." --Ken Boyer, Michigan State University

"This book will appeal to regulators, practitioners, and academics with an interest in cost of capital determination in regulated industries. Its depth of coverage of finance principles caters to interested readers from diverse backgrounds such as economics and law. Its greatest strength is its international focus and its discussion of regulatory practices globally, which I suspect will be enlightening to even the most experienced people in the field." --Philip Gharghori, Monash University

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