Mergers and acquisitions as a response to the deregulation of the electric power industry: value creation or value destruction?

Many electric utilities, as a response to the deregulation of the electric power industry, adopted a strategy of acquiring other electric or gas utilities. We examine whether these merger and acquisition strategies create value for the utility shareholders and whether the strategies result in superior post-merger operating and stock-price performance relative to utilities that did not grow through acquisitions. We find little evidence that the mergers and acquisitions created long-term value for a fully diversified investor. Furthermore, the stock price and operating performance of the acquirers under performed the stock price and operating performance of a control portfolio of utilities that did not engage in merger activity.      

Economic determinants of deregulation in the gas distribution market

Many state public commissions have deregulated their utility markets. However, evidence of welfare or efficiency improvements under deregulation is ambiguous. It is also unclear why different states adopt consumer choice, price caps, sliding-scale plans, or retain rate-of-return regulation. This study evaluates several economic factors behind deregulation in gas distribution markets using a survey of state commissions. Logistic and hazard models show that utilities’ prices and capacity, and states’ stock of own gas wells, prices of competing fuels and the regulatory climate, help explain the pattern of deregulation. Demonstration effects from surrounding markets also contribute. These factors make the propensity to use price caps versus restructuring vary regionally.     

Technological Change Bias In The U.S. Investor-Owned Electric Utility Industry Following Potential Deregulation

This paper estimates regulated and poientially deregulated costs of production for a multiproduct electric utility industry. The empirical evidence suggests technological regression with respect to costs in both regulated and deregulated environments. Analysis of factor cost shares indicates that technological change in a deregulated environment is expected to be less apital saving than technological change in the regulated environment. In addition, this study finds that overall diseconomies of scale may be nduced over time and to a greater extentunder deregulation than under regulation. Also, cost complementarities may be enhancedover time, but to a lesser extent under deregulation. Hence. tendencies toward natural monop oly may be increased or decreased by deregulation, and advancing deregulation may or may not be an appropriate policy.     

The Value Relevance of Earnings and Nonearnings Information in Regulated and Deregulated Markets: The Case of the Airline Industry

This paper examines the valuation effects of earnings and two nonearnings-based measurements (book values and operating cash flow) on security prices of airline companies under two different market structures: regulated and deregulated. The literature lacks empirical evidence in examining the relative importance of earnings and nonearnings accounting-based measurements in regulated and deregulated markets, especially in the airlines industry. We compare coefficient estimates of regressing stock prices on earnings, book value, and cash flow from operations of airline companies during regulated and deregulated times. A control sample of manufacturing companies is also used for supporting inferences from the airline sample’s findings. In a typical regulated market, using cost recovery plus an adequate rate of return on assets, security prices are highly aligned with nonearnings measurements such as the book value. In the airline industry, regulation took the form of guaranteed routes and subsidies to service rural areas, giving rise to a differential effect of both earnings and nonearnings measurements. Under deregulation, airline firms operate in highly competitive markets with large airline firms enjoying the benefits of economy of scale and service diversification. Thus, the asset capitalization (book value), cash flow, and operational efficiencies (earnings) would be major indicators in the market assessment of the firm’s future profitability and security price. This paper finds that nonearnings measures have higher explanatory power of security prices in regulated times for the airline firms. In deregulated times, although earnings have a stronger relationship with prices, nonearnings measures continued to influence stock price levels, reflecting airline specific economics.

Cost savings and deregulation: an analysis of fuel cost savings in deregulated electricity markets

Unregulated utilities face competitive pressures that lead to cost-minimizing activities, but regulated monopolies in the US electricity generation sector face pressures only from regulators who must balance a desire for lower prices against the need for the utility to generate a sufficient return to encourage investment. This paper analyses the cost-minimizing behaviours of regulated utilities by comparing their average input coal costs with those of deregulated utilities purchasing coal from the same mine during the same month of the same year. Results indicate that coal-fired electric plants operating in deregulated electricity markets negotiate prices that are 6.1 ¢/MMBtu (3.5%) less than their regulated counterparts. In percentage terms, this is a fairly small discount for deregulated plants, but it happens to be on par with the restructuring gains that others have estimated for labour and nonfuel costs.     

Productivity throughout regulatory cycles in gas utilities

This paper examines productivity patterns in price cap regulated utilities around price reviews. We specify a variable cost function that we estimate using alternative specifications of technical change. Results show that the pattern of pure technical change differs within and between regulatory cycles. They also provide evidence that exogenous investment reduces the ratchet-problem, that strategic cost cutting behavior is reduced when regulatory cycles are short and that, absent these two features, industry productivity is consistent with strategic cost cutting behavior.     

THE IMPACT OF UTILITY DEREGULATION IN ARIZONA

This analysis assesses Arizona's short-run price response to utility energy deregulation in the commercial and industrial sectors and the long-term response to deregulated industrial utility prices. Using a standard utility industry approach, ordinary least squares regression confirms commercial/industrial utility prices remain inelastic and Arizona's deregulation efforts have not effectively promoted short-run price competition. Moreover, widening differences in utility rates could be a response to a stronger long-run price elastic effect across states. The findings suggest states not aggressively deregulating utility price to narrow artificial comparative price advantages could be at a competitive disadvantage for interstate manufacturing investment. ( JEL Q41, Q48, Q40)     

Investment Incentives of a Regulated Dominant Firm

We study the investment incentives of a regulated, incumbent firm in a deregulation process. The regulator cannot commit to a long-term regulatory policy, and investment decisions are taken before optimal regulatory policies are imposed. We characterize the regulated incumbent's incentive to invest when a deregulation process is initiated and an unregulated firm enters the market as a result. The change in the marginal return to investment depends on how the investment changes the firm's virtual cost—the sum of its physical production and information costs. When the marginal return to investment increases due to deregulation, social welfare increases as a result of higher investment and more competition. Otherwise, the change in social welfare depends on the total of the effects in the fall of investment and increased competition. We also present conditions under which deregulation enhances welfare.     

Why Financial Deregulation?

Over the past six years, financial markets in Australia have been deregulated almost completely. This article attempts to explain why Australia's financial markets have been deregulated and why financial deregulation has occurred so quickly. It suggests the answers lie in changed perceptions of the usefulness of regulation as a means to specific ends. Exogenous developments in the financial environment altered the impact of regulations on financial institutions. The result was a weakening in the competitive position of regulated financial institutions relative to unregulated financial institutions and direct financiers. This led simultaneously to a reduction in the ability of the monetary authorities to control the growth of total financing and a growing perception amongst regulated institutions that the costs of regulated status outweighed the benefits. The rapid demise of the regulations can be traced to the joint realisation by the monetary authorities and the regulated institutions that the regulations no longer served their respective ends. This conjunction of 'public interest' and 'private interest' in financial deregulation can in turn be traced to the unique ability of financial markets to generate close substitutes for existing financial products at low cost.     

Merger Speculation in Financial Media: The Valuation of Investigative Reporting

The authors study abnormal returns and volume in the days surrounding takeover speculation by financial media. Significantly positive price and volume responses 2 days after publication are observed. While most of this effect dissipates shortly thereafter, some excess returns remain impounded into the stock price. A study of the ex post takeover probabilities suggests that a positive response is justified, as takeover probabilities for such firms subsequently increase. This evidence is consistent with the idea that financial media speculation can facilitate the release of useful private information to shareholders. However, significantly positive excess returns and volume in the few days before publication also suggests that certain shareholders may benefit disproportionately.     

Price Discrimination, Regulation and Entry in the UK Residential Electricity Market

The residential electricity market in Great Britain has recently been opened to competition and is served by 14 regional incumbents, and up to 15 entrants in each area. This study finds that the incumbents' regulated prices are discriminatory between consumers using different payment methods, and that firms are practising third‐degree price discrimination between areas. The authors discuss the implications for regulatory policy both in the UK and in other countries where electricity markets are being deregulated.     

The role of environmental factors in water utilities’ technical efficiency. Empirical evidence from Spanish companies

This article computes input-specific scores of technical efficiency for a sample of water utilities located in the southern Spanish region of Andalusia. In addition, differences in efficiency between different operating environments are investigated. Concerning the debate about ownership and efficiency, we find that privately owned companies outperform public utilities in their management of labour. Furthermore, technical efficiency is found to be greater among firms located in highly populated areas and for utilities providing water services to tourist municipalities. Finally, no empirical evidence supporting the greater technical efficiency of consortia of water utilities, a managerial strategy strongly encouraged by regional politicians, is found.     

Stranded Costs,Takings, and the Law and Economics of Implicit Contracts

Economic Analysis can help resolve the stranded cost controversy that has arisen in debates over electricity market deregulation. "Stranded costs" are costs electric utilities will not recover as power markets move from protected monopolies to an open, competitive environment. We describe the stranded cost problem, its magnitude and the prominent arguments for and against recovery. An economic analysis of implicit contracts can clarify whether there should be a legal duty to compensate utility shareholders for unrecovered costs. However, efficient approaches to electricity deregulation should rely on more than analysis of contracts. The politics of deregulation, as reflected in optimal compensation for regulatory "takings" of property, also affects the desirability of stranded cost recovery.     

The Regulation of the United Kingdom Electricity Industry: An Event Study of Price-Capping Measures

The privatization of United Kingdom utilities after 1979 established a regulatory regime based around price capping rather than return capping. This innovation was intended to provide a predictable framework that encouraged efficiency. An event methodology was used to examine stock market reaction to the main regulatory announcements affecting 12 Regional Electric Companies from flotation to 1995. The results indicate that the regulatory announcements were only a minor contributor to the persistent abnormal returns observed. The low connection between regulatory events, efficiency changes and abnormal returns at company level lead to a conclusion that the initial structural and control frameworks dominated the regulatory framework.     

The relationship between regulation and prices in the workers' compensation insurance market

This study examined the effect of different state regulatory policies on the price of workers' compensation insurance. Using a time series of state cross section data for the years 1980–1987, estimates were obtained for models that differed according to how price was measured and whether the regulatory variables were treated as endogenous. When the regulatory variables were treated as exogenous, the results show that price is lower in deregulated states compared to states with prior approval regulation. Results for models with endogenous regulatory variables indicate that price tends to be lower in deregulated states, although the estimates are not statistically significant.     

Psychological Oil Price Barrier and Firm Returns

In this paper, we investigate the psychological barrier effect induced by the oil price on firm returns when the oil price reaches US$100 or more per barrel. We find evidence of the negative effect of the US$100 oil price barrier for: (a) the entire sample of 1559 firms listed on the American stock exchanges; (b) both foreign and domestic firms, with domestic firms significantly more affected; (c) the 10 different sizes of firms, with the smaller firms less affected compared to the larger firms; and (d) 17 sectors of firms, with firms in the utilities, mining, and administration sectors being the least affected.     

Oil prices and stock returns: nonlinear links across sectors

We present evidence of an asymmetric relationship between oil prices and stock returns. The two regime multivariate Markov switching vector autoregressive (MSVAR) model allow us to capture the state shifts in the relationship between regional stock markets and sectors. Results suggest that oil price risk is significantly priced in the sample used. The impact is asymmetric with respect to market phases, and regimes have been associated with world economic, social and political events. Our study also suggests asymmetric responses of sector stock returns to oil price changes and different transmission impacts depending on the sector analyzed. There is a high causality from oil to sectors like Industrials and Oil & Gas. Companies inside the Utilities sector were more able to hedge against oil price increases between 2007 and 2012. Historical crisis events between 1992–1998 and 2003–2007 do not seem to have affected the relationship between oil and sector stock returns, given the higher probability of remaining smoother. For all sectors there seems to be a turn back to stability from 2012 onwards. Finally, investors gain more through portfolio diversification benefits built across, rather than within sectors.     

Consumer Self-Generation and Monopoly Limit-Pricing under Timing Uncertainty of Deregulation in the Electricity Market

Due to uncertainty in the timing of deregulation for electric power generation, large and potentially self-generating consumers should consider a lost option value as part of the cost of any investment they consider. This paper uses a simple two-period model to analyze the role played by the timing anticipation of deregulation in the decision making of potential self-generators (PSGs) and for limit-contract pricing of local utilities. We develop an effective limit-pricing rule and conclude that a higher-probability of early deregulation will lead utilities to retain more consumers and to set higher limit prices before deregulation. A possible early deregulation might not harm utilities; it could even benefit utilities in finite lifetime periods. Finally, a simulation is provided which supports our main results and shows that the effects on utilities' expected profits of uncertainty about the coming deregulation will depend on the distribution of consumer types.     

Does crude oil move stock markets in Europe? A sector investigation

The aim of this article is to investigate the responses of European sector stock markets to oil price changes. We use linear and asymmetric models and study the association of oil and stock prices. Our findings suggest that the strength of this association varies greatly across sectors. Moreover, for some sectors we find strong evidence of asymmetry in the reaction of stock returns to changes in the price of oil.     

Nonlinear Pricing, Redistribution, and Optimal Tax Policy

This paper examines the role of nonlinear pricing by public (or regulated) utilities as a redistributive mechanism in presence of an optimal nonlinear income tax. It models an economy with many types of persons who differ in two unobservable characteristics (earning abilities and tastes). We show that nonlinear pricing does have a redistributive role; it is not a substitute for an ill-designed tax policy. We prove, assuming separable preferences, that a person whose valuation of the public sector output is smaller than the average valuation of the population (all measured at the same consumption bundle) must face a marginal price for the good above its marginal cost. Further assuming that tastes and earning abilities are perfectly correlated, we prove that everyone must face a marginal price for the public sector's output which strictly exceeds its marginal cost if correlation is positive. These properties provide an economic rationale for the provision of "support for low-income consumers" as mandated by the universal service and similar regulatory policies. Finally, we show that with correlated characteristics, implementation can be achieved through two separate functions: a pricing function that depends only on the public sector output and a tax function that depends only on income.