Risk, Volatility and Regulation in Water Supply and Distribution

a post-privatization comparison of UK and US water utilities

Roger Buckland, Julian Williams

Research output: Working paper

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Abstract

This paper addresses a core issue for the regulated utility: what are the risks taken by investors in organisations that supply a product whose supply is regulated? Prior research on returns of regulated water supply and distribution companies in the United Kingdom 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, 2001).

The current research analyses the returns on securities issued by regualted water companies in differently-regulated economies of the UK and the USA, using data from 1986 to 2010. Mirroring the results from the 1990s, the results suggest that regulators chronically overestimated the risks borne by investors in water utilities, resulting in lax pressure on permitted returns and higher prices than are needed to provoke efficient supply. The analysis confirms that there are striking differences between the regulatory risks and patterns of returns for wate utilities in the USA and UK.
Original languageEnglish
Place of PublicationAberdeen
PublisherUniversity of Aberdeen
Number of pages44
Publication statusUnpublished - 2013

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Water supply
Water utilities
Privatization
Volatility risk
Investors
Equity returns
Systematic risk
Equity
Water

Keywords

  • regulation
  • utilities
  • systematic risk

Cite this

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abstract = "This paper addresses a core issue for the regulated utility: what are the risks taken by investors in organisations that supply a product whose supply is regulated? Prior research on returns of regulated water supply and distribution companies in the United Kingdom 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, 2001). The current research analyses the returns on securities issued by regualted water companies in differently-regulated economies of the UK and the USA, using data from 1986 to 2010. Mirroring the results from the 1990s, the results suggest that regulators chronically overestimated the risks borne by investors in water utilities, resulting in lax pressure on permitted returns and higher prices than are needed to provoke efficient supply. The analysis confirms that there are striking differences between the regulatory risks and patterns of returns for wate utilities in the USA and UK.",
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