Regulatory structure and risk and infrastructure firms : an international comparison

Evidence about how choice of regulatory regimes affects the level of shareholder risk for the regulated company has traditionally focused on studies in the United Kingdom and the United States. Broad comparisons of price-cap based regimes (as practiced in the UK) with rate-of-return regulation (as practiced in the US) show price-cap based regimes to be associated with higher levels of shareholder risk (as measured by the beta value) than rate-of-return regulation is. But so few countries were compared that it was suspected that other factors could be at work. The authors broaden the investigation by studying more countries (including regulated utilities in Canada, Europe,, and Latin America), doing a sectoral comparison to control for some risks related to factors other than the regulatory regime, and use narrower classifications for the regulatory regime. They also look at such recent evidence as the move from relatively pure price caps in the UK electricity sector to a mixed-revenue/price-cap based system. The authors find results aligned with earlier research, namely that investors bear the greatest nondiversifiable risk with price caps and the least nondiversifiable risk with rate-of-return regulation.