Regulatory Risk and the Cost of Capital: Determinants and Implications for Rate Regulation

3540308016......Page 1
Contents......Page 9
Foreword......Page 5
Acknowledgments......Page 7
1 Introduction......Page 12
2.1.1 Monopolistic Model of Rate Regulation......Page 19
2.1.2 Competitive Model of Rate Regulation......Page 20
2.2 Systematization of the Objectives and Principles of Rate Regulation......Page 21
2.3 Characterization of the Cost-Orientated Rate Setting Process......Page 24
2.4 Comparison of the Role of the Cost of Capital in Different Cost Concepts of Rate Regulation......Page 26
2.5 Comparison of the Role of the Cost of Capital Under Different Types of Rate Regulation......Page 28
2.6 Comparison of the Role of the Cost of Capital and the Rate of Return in Regulated and Non-Regulated Firms......Page 29
2.7 Characterization of Regulatory Risk......Page 31
3.1 Development of a Framework of Rate Regulation for the Analysis of Regulatory Risk......Page 33
3.2 Analysis of Circularity and (Time) Inconsistency as Fundamental Problems of Rate Regulation......Page 37
3.3 Systematization and Analysis of the Effects of Rate Regulation on the Risk of a Regulated Firm......Page 42
3.3.1 Elimination of Risk by Rate Regulation?......Page 44
3.3.2 Increase or Decrease of (Systematic) Risk by Rate Regulation?......Page 45
3.3.3 Asymmetric Regulatory Risk......Page 50
3.4 Systematization and Analysis of the Transmission Paths of the Effects of Rate Regulation on the Risk of a Regulated Firm......Page 54
3.4.2 Indirect Effects of Rate Regulation via Adjustments of Investment and Financing......Page 55
4 Development of a Regulatory Control Panel – Analysis of Individual Variables of Rate Regulation as Determinants of Regulatory Risk......Page 64
4.1.1 Profit Elements Covered by Rate Regulation......Page 66
4.1.2 Regulatory Review Period and Regulatory Lag......Page 69
4.1.3 Degree of Regulatory Discretion......Page 72
4.1.4 Bandwidth Within Which the Actual Rate of Return Can Vary......Page 74
4.2.1 Regulatory Cost Concept......Page 81
4.2.2 Accounting Directives Determining Operating Expenditures......Page 83
4.2.3 Accounting Directives Determining Capital Expenditures......Page 86
4.2.4 Impact of the Cost Distribution Base on the Capacity Utilization Risk......Page 107
4.3 Impact of Variables Determining the Scope of Regulation......Page 108
4.3.1 Scope of Regulated Decisions......Page 109
4.3.2 Scope of Regulated Firms......Page 114
4.3.3 Scope of Regulated Markets......Page 120
4.4 Case Study: California Energy Crisis as the Result of an Incompatible Combination of Regulatory Variables......Page 123
5 Determination of the Regulatory Rate Base......Page 127
5.1 Characterization of a Hypothetical Benchmark System of Rate Regulation Establishing Equality of Book Values and Market Values......Page 128
5.1.1 Consistent Treatment of the Regulatory Rate Base, Depreciation, and Interest......Page 129
5.1.2 Inclusion of New Investment in the Regulatory Rate Base......Page 149
5.1.3 Investments Accounted for as Operating Expenditures......Page 150
5.2 Explanation of Deviations of Market Values from Book Values in the Case of Rate-Regulated Firms - Rationale for Using Book Values in the Regulatory Rate Base......Page 151
5.2.1 Deviations Due to Characteristics of Real Systems of Rate Regulation......Page 152
5.2.2 Deviations Due to Future Investment Possibilities After an Anticipated Phasing-Out of Rate Regulation......Page 158
5.2.3 Deviations Due to Activities in Non-Regulated Business Divisions......Page 159
5.3 Reconciliation of the Use of Book Values in the Regulatory Rate Base with the Return Required by Investors......Page 160
5.3.2 Existing Private Investments......Page 162
5.3.3 Privatization of Public Enterprises......Page 165
6 Market-Based Assessment of the Cost of Capital for a Rate- Regulated Firm......Page 170
6.1 Identification of Specifics of Cost-Orientated Rate Regulation Relevant for Cost of Capital Assessment......Page 172
6.2.1 Risk-Less Interest Rate......Page 174
6.2.2 Risk Premium for Debt......Page 176
6.2.3 Market Equity Risk Premium......Page 177
6.2.4 Beta Factor......Page 180
6.2.5 Beta Factors for Non-Listed Rate-Regulated Firms or Divisions......Page 184
6.3.1 Components of the Capital Structure......Page 188
6.3.2 Actual Versus Optimized Capital Structure......Page 190
6.3.3 Temporal Dimension of the Capital Structure......Page 192
6.4.1 Narrowing down the Object of Investigation to Definitive Corporate Income Taxes......Page 193
6.4.2 Accounting for Definitive Corporate Income Taxes Under Current German Tax Law......Page 195
6.4.3 Critical Discussion of the Formula-Based Conversion of a Post-Tax into a Pre-Tax Rate of Cost of Capital......Page 196
7 Conclusions......Page 199
A......Page 205
B......Page 206
C......Page 208
D......Page 210
F......Page 211
H......Page 212
I......Page 213
K......Page 214
L......Page 215
M......Page 216
O......Page 217
R......Page 218
S......Page 220
V......Page 222
Z......Page 223
D......Page 224
P......Page 225
Y......Page 226