Regulatory Finance: Financial Foundations of Rate of Return Regulation

by Howard E. Thompson

Overview

This monograph is concerned with the determination of the allowed rate ofreturn in rate cases which, in part, determines the rates ofcharge to customers of public utilities. Rate of return determination has been a central topic in utility regulation for a century. Recent changes in the traditionally regulated markets - electricity, gas, and telephone - have shoved discussion of rate of return determination into the background, replacing it by technology changes, competition, downsizing, deregulation, and reg'ulatory incentive systems. These new issues have made the regula­ tory sector, which had the reputation of being stodgy and uninteresting, an exciting field ofstudy. But rate ofreturn is not dead. It will playa key role in whatever the new structure of the regulated sector. Separating generation from transmis­ sion and distribution will not eliminate the need for rate of return analysis in the electric utility industry. Rather, it may well increase the number of companies for which the rate of return needs to be determined. It will playa fundamental role in the new regulatory environment. Incentive systems in the regulated sector may be the wave of the future but they will use the required rate ofreturn as a benchmark. Rate case will persist. Most rate cases include opposing testimony as to the "fair" rate of return or even the cost ofcapital for a public utility whose rates are at issue.

Product Details

ISBN-13:	9781461367628
Publisher:	Springer US
Publication date:	10/11/2012
Series:	Topics in Regulatory Economics and Policy , #9
Edition description:	Softcover reprint of the original 1st ed. 1991
Pages:	243
Product dimensions:	6.10(w) x 9.25(h) x 0.02(d)

Table of Contents

I The Institutional Setting for Rate of Return Determination.- 1 Rate of Return in Rate Cases: The Institutional Setting.- 2 Earned Rates of Return, Allowed Rates of Return and the Cost of Capital in a Historical Setting.- II Theory of Rate of Return Determination.- 3 Traditional Models: DCF and Comparable Earnings.- 4 Traditional Models: CAPM and Risk Analysis.- 5 Recent Models: Arbitrage Pricing Theory.- 6 Recent Models: Valuation of Contingent Claims and Regulation.- 7 Issues in the Theory of Rate of Return.- III Methodologies for Rate of Return Determination.- 8 Methodology of Comparable Earnings and DCF.- 9 The Methodology for Risk Analysis.- 10 Methodology of Arbitrage Pricing Theory.- 11 Issues in Methodology for Determining the Rate of Return.- IV Judgment and Rate of Return Determination.- 12 The Past and the Present: Adapting to Change.- 13 Factors Not Incorporated into the Models.- 14 The Reliability of Rate of Return Judgment.- 15 Beyond Rate of Return Regulation.- References.- List of Symbols.