Risk and return under changing regulation: An empirical analysis

It has been observed that utility executives generally argue for inflation-adjusted rate bases while consumer groups advocate original-cost valuation methods. Recent analytical and empirical studies indicate rate-base valuation methods should not and do not account for differences in utilities-accounting-realized rates of return. However, there is evidence that changes in valuation methods may cause changes in realized returns due to over- or under-compensation for the effects of inflation. This study examines the impact of changes in rate-base valuation methods on (1) systematic risk, (2) expected shareholder returns and (3) realized shareholder returns. A unique time series data set and a new statistical procedure are utilized. Overall, the results are consistent with the earlier analytical and empirical studies. However, the results for utilities in one state provide support for the argument that investors fare better under fair-value regulation.