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Effects of Regulation on Utility Financing: Theory and Evidence

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  • Robert A. Taggart, Jr.

Abstract

This paper examines the financing decisions of regulated public utilities. It is argued that the regulatory process affects utility financing choices both by conditioning the environment in which these choices are made and by creating opportunities for firms to influence the regulated price through strategic financing behavior. The nature of this regulatory effect continually changes, however, as economic conditions change and as regulators, firms and consumers adapt to one another's decisions. The direction of the impact on utility financing, therefore, may differ both over time and across regulatory jurisdictions. This theory of regulatory influence is tested by examining several episodes in the financing experience of U.S. electric utilities from 1912 to 1979. Evidence of a regulatory effect on utility financing is found particularly for the early years of state commission regulation. Examples of an adaptive response pattern on the part of regulators, firms and consumers are also cited.

Suggested Citation

  • Robert A. Taggart, Jr., 1982. "Effects of Regulation on Utility Financing: Theory and Evidence," NBER Working Papers 0866, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0866
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    Cited by:

    1. Clive Stones, 2007. "Risk Sharing, the Cost of Equity and the Optimal Capital Structure of the Regulated Firm," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 30(2), pages 139-159, March.
    2. Bernardo Bortolotti & Carlo Cambini & Laura Rondi & Yossi Spiegel, 2011. "Capital Structure and Regulation: Do Ownership and Regulatory Independence Matter?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(2), pages 517-564, June.
    3. Robert Klein & Richard Phillips & Wenyan Shiu, 2002. "The Capital Structure of Firms Subject to Price Regulation: Evidence from the Insurance Industry," Journal of Financial Services Research, Springer;Western Finance Association, vol. 21(1), pages 79-100, February.
    4. J. Cummins & Neil Doherty, 2002. "Capitalization of the Property-Liability Insurance Industry: Overview," Journal of Financial Services Research, Springer;Western Finance Association, vol. 21(1), pages 5-14, February.
    5. Strauss, Jason David, 2008. "The financial leverage of Insurers subject to price regulation: evidence from Canada," MPRA Paper 10845, University Library of Munich, Germany.

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