The Use of Adjusted Betas in Public Utility Regulation

An analysis is made of the appropriateness of various beta adjustment methods in regulatory proceedings. First, the concepts involved in the estimation of and adjustments to beta are reviewed. Next, sampling procedures are presented that are used in formulating a beta adjustment procedure and their relative merits are discussed. The most important issue is found to be the selection of a sample of stocks upon which to estimate adjustment parameters. The appropriate sample selection is dependent on the relative distributions of utility and nonutility betas. A statistically different distribution of electric utility betas since World War II is found. Therefore, it is concluded that an adjustment procedure based on the behavior of a market sample is inappropriate for application in the case of electric utility betas. The implementation of an adjustment procedure is a crucial portion of the risk-assessment process.