Risk and Return for Regulated Industries

Chapter 1. Motivation: Why a Book Now on the Required Rate of Return?

• Introduction
• Why Regulate Prices in the First Place?
• Why is Determining Reasonable Profits Hard?
• Plan of the Book

Chapter 2. Legal Foundations and Regulatory Frameworks for a Fair Return

• Introduction
• Rate Regulation in the United States
• The Rate Base
• Rate Regulation in Canada
• Rate Regulation in the United Kingdom
• Rate Regulation Elsewhere
• Rate Regulation in Developing Economies
• Interaction of the Regulatory Framework and Cost of Capital

Chapter 3. Financial Asset Pricing Principles

• Introduction
• Risk–Return Trade-off
• What Should We Expect From Models?
• Selecting a Comparable Sample

Chapter 4. The Capital Asset Pricing Model and Variations

• Introduction
• Types of Risk
• The Original Capital Asset Pricing Model
• Capital Asset Pricing Model Implementation Issues and Approaches
• Empirical Challenges to the Capital Asset Pricing Model
• Summing up the Capital Asset Pricing Model

Chapter 5. Discounted Cash Flow Models

• Introduction
• Constant Growth Discounted Cash Flow Model
• Multistage Discounted Cash Flow Models
• Discounted Cash Flow Implementation Issues
• Cautions on the Fundamental Premise of the Discounted Cash Flow Approach
• Summing Up the DCF Model

Chapter 6. Multifactor and Other Cost of Capital Estimation Models

• Introduction
• Risk Premium Model
• Arbitrage Pricing Theory
• Fama–French Models
• Buildup Models
• Comparable Earnings
• Conclusion

Chapter 7. Effects of Capital Structure on Cost of Capital

• Introduction
• Example of Debt's Effects: Home Mortgages
• Research on the Effects of Debt on the Cost of Capital
• Conclusion

Chapter 8. Approaches to Rate Base Measurement

• Introduction
• Inflation Affects Competition and Original Cost Regulation Differently
• Why Does the Tomatoes Theorem Matter?
• Four Approaches to Regulatory Capital Recovery: The Concepts
• Additional Implementation Issues for Inflation-Adjusted Approaches
• Rate Base Methods Outside Canada and the United States
• Summary of Approaches

Chapter 9. Rate of Return Practices in Use

• Introduction
• Practices in the United States
• Practices in Canada
• The United Kingdom (Office of Gas and Electricity Markets)
• The Netherlands (The Autoriteit Consument & Markt)
• Italy
• Australia
• Summary of Approaches to Determining the Rate of Return
• Why Do Different Places Use Different Methodologies?

Chapter 10. Asymmetric Risk: Theory and Examples

• Introduction
• The Cost of Capital Versus the Yield to Maturity on Corporate Bonds
• Relationship to Regulated Returns
• Your Questions Answered
• Potential Remedies
• Asymmetric Risks in Action
• Potential Future “Black Swans”
• Looking Forward

Chapter 11. Emerging Issues and Implications for Cost of Capital

• Introduction
• Reflecting System Shocks
• Alternative Ownership Structures
• Evolving Utility Business Models
• Concluding Remarks

Appendix A. Features That Affect Capital Structure

Appendix B. Further Reading on Approaches to Rate Base Measurement