The scale and patterns of abnormal returns to equity investment in UK electricity distribution

This article explores the scale and behaviour of abnormal equity returns for 12 regional electricity companies (RECs) in the UK. Using the Capital Asset Pricing Model (CAPM) and the Kalman Filter, we estimate time variation in abnormal returns (alpha) and in systematic risk (beta) coefficients. Substantial time variation in both returns and risk is demonstrated, with strong evidence of regulatory and political impacts. The article confirms that significant excess returns have been generated in privatised electricity distribution in the UK. It also suggests that overestimation of systematic risk faced by investors may imply further excess returns in the next regulatory review period.