Market Model Stationarity of Individual Public Utilities

Roger P. Bey

Journal of Financial and Quantitative Analysis, 1983, vol. 18, issue 1, 67-85

Abstract: The search for an economically sound procedure for estimating an appropriate rate of return on equity consistent with the Supreme Court's ruling in the Hope case [13] has led many economists, financial experts, and public service commissions to estimate the rate of return on equity with the capital asset pricing model (CAPM) (see [30], [19], and [21]). The popularity of the CAPM in regulatory proceedings was reported by Harrington [15] who, in a survey of public service commissions, found that 38 states were considering or had seen the CAPM used, two jurisdictions preferred the CAPM, Oregon required the CAPM, and South Carolina would require the CAPM in all future cases. Hence, given the popularity of the CAPM and the tremendous economic impact that outcomes of regulatory proceedings have on the financial well-being of both the regulated firm and the consumer, it is critical that if the CAPM is used in regulatory proceedings that it be applied in the best manner possible and that any limitations associated with the CAPM be recognized fully.

Date: 1983
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