ISBN: 3540308016
TITLE: Regulatory Risk and the Costs of Capital
AUTHOR: Pedell
TOC:

Foreword V
Acknowledgments VII
Contents IX
1 Introduction 1
2 Basic Elements for a Comprehensive Concept of Regulatory Risk - Models, Objectives, Process, Cost Concepts and Types of Rate Regulation 9
2.1 Characterization of the Two Basic Models of Rate Regulation 9
2.1.1 Monopolistic Model of Rate Regulation 9 2.1.2 Competitive Model of Rate Regulation 10
2.2 Systematization of the Objectives and Principles of Rate Regulation 11
2.3 Characterization of the Cost-Orientated Rate Setting Process 14
2.4 Comparison of the Role of the Cost of Capital in Different Cost Concepts of Rate Regulation 16
2.5 Comparison of the Role of the Cost of Capital Under Different Types of Rate Regulation 18
2.6 Comparison of the Role of the Cost of Capital and the Rate of Retum in Regulated and Non-Regulated Firms 19
2.7 Characterization of Regulatory Risk 21
3 Impact of Rate Regulation an the Risk of a Regulated Firm 23
3.1 Development of a Framework of Rate Regulation for the Analysis of Regulatory Risk 23
3.2 Analysis of Circularity and (Time) Inconsistency as Fundamental Problems of Rate Regulation 27
3.3 Systematization and Analysis of the Effects of Rate Regulation an the Risk of a Regulated Firm 32
3.3.1 Elimination of Risk by Rate Regulation? 34
3.3.2 Increase or Decrease of (Systematic) Risk by Rate Regulation? 35
3.3.3 Asymmetric Regulatory Risk 40
3.4 Systematization and Analysis of the Transmission Paths of the Effects of Rate Regulation an the Risk of a Regulated Firm 44
3.4.1 Direct Impact of Rate Regulation an Risk 45
3.4.2 Indirect Effects of Rate Regulation via Adjustments of Investment and Financing 45
4 Development of a Regulatory Control Panel - Analysis of Individual Variables of Rate Regulation as Determinants of Regulatory Risk 55
4.1 Impact of the Overall Regulatory System Variables an Risk 57
4.1.1 Profit Elements Covered by Rate Regulation 57
4.1.2 Regulatory Review Period and Regulatory Lag 60
4.1.3 Degree of Regulatory Discretion 63
 4.1.4 Bandwidth Within Which the Actual Rate of Return Can Vary 65
4.2 Impact of Regulatory Accounting Directives an Risk 72
4.2.1 Regulatory Cost Concept 72
4.2.2 Accounting Directives Determining Operating Expenditures. 74
4.2.3 Accounting Directives Determining Capital Expenditures 77
4.2.4 Impact of the Cost Distribution Base an the Capacity Utilization Risk 98
4.3 Impact of Variables Determining the Scope of Regulation 99
4.3.1 Scope of Regulated Decisions 100
4.3.2 Scope of Regulated Firms 105
4.3.3 Scope of Regulated Markets 111
4.4 Case Study: California Energy Crisis as the Result of an Incompatible Combination of Regulatory Variables 114
5 Determination of the Regulatory Rate Base 119
5.1 Characterization of a Hypothetical Benchmark System of Rate Regulation Establishing Equality of Book Values and Market Values 120
5.1.1 Consistent Treatment of the Regulatory Rate Base, Depreciation, and Interest 121
5.1.2 Inclusion of New Investment in the Regulatory Rate Base 141
5.1.3 Investments Accounted for as Operating Expenditures 142
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 143
5.2.1 Deviations Due to Characteristics of Real Systems of Rate Regulation 144 5.2.2 Deviations Due to Future Investment Possibilities After an Anticipated Phasing-Out of Rate Regulation 150
5.2.3 Deviations Due to Activities in Non-Regulated Business Divisions 151
5.3 Reconciliation of the Use of Book Values in the Regulatory Rate Base with the Return Required by Investors 152
5.3.1 New Private Investments 154
5.3.2 Existing Private Investments 154
5.3.3 Privatization of Public Enterprises 157
6 Market-Based Assessment of the Cost of Capital for a RateRegulated Firm 163 6.1 Identification of Specifics of Cost-Orientated Rate Regulation Relevant for Cost of Capital Assessment 165
6.2 Assessment of the Input Parameters of Cost of Debt and Cost of Equity 167
6.2.1 Risk-Less Interest Rate 167
6.2.2 Risk Premium for Debt 169
6.2.3 Market Equity Risk Premium 170
6.2.4 Beta Factor 173
6.2.5 Beta Factors for Non-Listed Rate-Regulated Firms or Divisions 177
6.3 Weighting of the Cost of Equity and the Cost of Debt with the Capital Structure 181
6.3.1 Components of the Capital Structure 181
6.3.2 Actual Versus Optimized Capital Structure 183
6.3.3 Temporal Dimension of the Capital Structure 185
6.4 Accounting for Income Taxes in the Cost of Capital 186
6.4.1 Narrowing down the Object of Investigation to Definitive Corporate Income Taxes 186
6.4.2 Accounting for Definitive Corporate Income Taxes Under Current German Tax Law 188
6.4.3 Critical Discussion of the Formula-Based Conversion of a Post-Tax into a Pre-Tax Rate of Cost of Capital 189
7 Conclusions 193
References 199
Index 219
END
