Risk and regulation in water utilities: a cross-country comparison of evidence from the CAPM

Roger Buckland, Janice Beecher, Julian Williams

Research output: Contribution to journalArticle

4 Citations (Scopus)
11 Downloads (Pure)

Abstract

This paper addresses a core issue for the regulated utility: what are the risks taken by investors in companies that supply a product whose supply is regulated? Prior research on returns of regulated water supply and distribution companies concluded that regulation interacts significantly with equity returns and that the systematic risk and hence required returns of water utilities equity were low and decreasing over time (Buckland and Fraser, J Bus Financ Account 28(7–8):877–904, 2001). The current research analyses the returns on securities issued by regulated water companies in the differently regulated economies of the UK and the US, using data from 1980 to 2010. Mirroring the results from the 1990s, the evidence suggests that UK regulators have chronically overestimated the systematic risks borne by investors in water utilities, resulting in lax pressure on permitted returns and higher prices than are needed to provoke efficiency. The analysis also confirms that there are striking differences between the regulatory risks and patterns of returns for private sector water utilities in the UK
and the US.
Original languageEnglish
Pages (from-to)117-145
Number of pages29
JournalJournal of Regulatory Economics
Volume47
Issue number2
Early online date4 Nov 2014
DOIs
Publication statusPublished - Apr 2015

Fingerprint

Cross-country comparison
Capital asset pricing model
Water utilities
Systematic risk
Investors
Equity returns
Water supply
Private sector
Equity
Bus
Water

Keywords

  • water utilities
  • CAPM
  • risk and regulation
  • time-varying risk

Cite this

Risk and regulation in water utilities : a cross-country comparison of evidence from the CAPM. / Buckland, Roger; Beecher, Janice; Williams, Julian.

In: Journal of Regulatory Economics, Vol. 47, No. 2, 04.2015, p. 117-145.

Research output: Contribution to journalArticle

@article{dac43628e910456f80f69ebe4042cc74,
title = "Risk and regulation in water utilities: a cross-country comparison of evidence from the CAPM",
abstract = "This paper addresses a core issue for the regulated utility: what are the risks taken by investors in companies that supply a product whose supply is regulated? Prior research on returns of regulated water supply and distribution companies concluded that regulation interacts significantly with equity returns and that the systematic risk and hence required returns of water utilities equity were low and decreasing over time (Buckland and Fraser, J Bus Financ Account 28(7–8):877–904, 2001). The current research analyses the returns on securities issued by regulated water companies in the differently regulated economies of the UK and the US, using data from 1980 to 2010. Mirroring the results from the 1990s, the evidence suggests that UK regulators have chronically overestimated the systematic risks borne by investors in water utilities, resulting in lax pressure on permitted returns and higher prices than are needed to provoke efficiency. The analysis also confirms that there are striking differences between the regulatory risks and patterns of returns for private sector water utilities in the UKand the US.",
keywords = "water utilities, CAPM , risk and regulation, time-varying risk",
author = "Roger Buckland and Janice Beecher and Julian Williams",
note = "Acknowledgements The authors thank colleagues at the Business School, Aberdeen and the IPU,Michigan State for valuable comments, as well as participants at various workshops and presentations, along with the editor and reviewers for their constructive comments. Any remaining errors are, of course, the authors’ responsibility",
year = "2015",
month = "4",
doi = "10.1007/s11149-014-9261-z",
language = "English",
volume = "47",
pages = "117--145",
journal = "Journal of Regulatory Economics",
issn = "0922-680X",
publisher = "Springer Netherlands",
number = "2",

}

TY - JOUR

T1 - Risk and regulation in water utilities

T2 - a cross-country comparison of evidence from the CAPM

AU - Buckland, Roger

AU - Beecher, Janice

AU - Williams, Julian

N1 - Acknowledgements The authors thank colleagues at the Business School, Aberdeen and the IPU,Michigan State for valuable comments, as well as participants at various workshops and presentations, along with the editor and reviewers for their constructive comments. Any remaining errors are, of course, the authors’ responsibility

PY - 2015/4

Y1 - 2015/4

N2 - This paper addresses a core issue for the regulated utility: what are the risks taken by investors in companies that supply a product whose supply is regulated? Prior research on returns of regulated water supply and distribution companies concluded that regulation interacts significantly with equity returns and that the systematic risk and hence required returns of water utilities equity were low and decreasing over time (Buckland and Fraser, J Bus Financ Account 28(7–8):877–904, 2001). The current research analyses the returns on securities issued by regulated water companies in the differently regulated economies of the UK and the US, using data from 1980 to 2010. Mirroring the results from the 1990s, the evidence suggests that UK regulators have chronically overestimated the systematic risks borne by investors in water utilities, resulting in lax pressure on permitted returns and higher prices than are needed to provoke efficiency. The analysis also confirms that there are striking differences between the regulatory risks and patterns of returns for private sector water utilities in the UKand the US.

AB - This paper addresses a core issue for the regulated utility: what are the risks taken by investors in companies that supply a product whose supply is regulated? Prior research on returns of regulated water supply and distribution companies concluded that regulation interacts significantly with equity returns and that the systematic risk and hence required returns of water utilities equity were low and decreasing over time (Buckland and Fraser, J Bus Financ Account 28(7–8):877–904, 2001). The current research analyses the returns on securities issued by regulated water companies in the differently regulated economies of the UK and the US, using data from 1980 to 2010. Mirroring the results from the 1990s, the evidence suggests that UK regulators have chronically overestimated the systematic risks borne by investors in water utilities, resulting in lax pressure on permitted returns and higher prices than are needed to provoke efficiency. The analysis also confirms that there are striking differences between the regulatory risks and patterns of returns for private sector water utilities in the UKand the US.

KW - water utilities

KW - CAPM

KW - risk and regulation

KW - time-varying risk

U2 - 10.1007/s11149-014-9261-z

DO - 10.1007/s11149-014-9261-z

M3 - Article

VL - 47

SP - 117

EP - 145

JO - Journal of Regulatory Economics

JF - Journal of Regulatory Economics

SN - 0922-680X

IS - 2

ER -