Risk, return and rate base valuation methods : an empirical analysis / BEBR No.872

Abstract

Includes bibliographical references (p. 25-26).It has been observed that utility executives generally argue for inflation adjusted rate bases while consumer groups advocate original cost valuation methods. Recent analytic and empirical studies indicate that rate base valuation methods should not and do not account for differences in utilities' 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 evaluation methods on (1) expected shareholder returns, (2) realized shareholder returns, and (3) systematic risk. A unique time series data set and a new statistical procedure are used. Overall, the results are consistent with earlier studies. However, the results for utilities in one state provide support for the argument that investors fare better under fair value regulation