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May 02, 2017
Brattle Economists Author Risk and Return for Regulated Industries

Brattle Principals Bente Villadsen, Michael Vilbert, and Dan Harris, and Principal Emeritus A. Lawrence Kolbe have authored a new book that examines the topic of cost of capital for regulated industries.

Risk and Return for Regulated Industries, published by Elsevier, establishes the principles and procedures for determining the fair rate of return on capital investment. Drawing on lessons learned from North America, Europe, Australia, and New Zealand, the book reviews the fundamental issues regarding capital structure, rate base estimation, asymmetric risk, and risk sharing in the terms of utility cost recovery, and factors that impact the accuracy of cost of capital estimates. The book also features a foreword by Stewart C. Myers, a Brattle principal and professor of financial economics at the MIT Sloan School of Management.

Risk and Return for Regulated Industries also includes an examination of asymmetric risk. Utilities sometimes face potential events or systemic changes in circumstances that few saw coming, but which can raise solvency-threatening risks (“black swans”), without symmetric opportunities that could make utility service substantially more profitable for investors. The authors provide a review of potential solutions and discuss future asymmetric risks facing the utility sectors, including the impacts of fracking on the gas pipeline industry or the risks of stranded capital investments in electric utility infrastructure if flat or falling demand persists or even accelerates.

The book also reviews of emerging issues in cost of capital that reflects the implications of select economic, technological, and demographic trends affecting regulated industries in recent years. It examines recent system shocks as well as new ownership models that have emerged as potentially advantageous vehicles for regulated businesses. Noting the threat of disruptive trends, such as reduced demand for electricity and the shift from central to distributed resources, the book concludes with a discussion of evolving business models for the utility industry.

For more information, please view the book brochure below. For ordering information, please visit Elsevier’s website.