A Review of the Use of Beta in Regulatory Proceedings

The Supreme Court in 1944 stated that "the return to the equity owner should be commensurate with returns on investment in other enterprises having corresponding risks" (FPC v. Hope Natural Gas). Such a decree essentially created a new service industry -- a cadre of well-paid financial practitioners and theoreticians who express their opinions on equity cost of public utilities. One group of recent origin among such expert witnesses uses beta as a measure of risk. How this group measures and uses beta to estimate cost of equity capital is the topic of this study.