Regulatory reform and productivity growth in the UK's public utilities

The reforms in the regulation of the UK'nationalised industries over the last decade are examined and the extent to which they have been successful in achieving one of their declared aims – that of increasing the efficiency of the enterprises' operations – is considered. To achieve this the productivity performance of nine of the largest enterprises over the last twenty years was analysed. The results show that the rate of productivity growth has been significantly higher during the 1980s, compared with the preceeding decade. It is concluded that a large part of the observed upturn in productivity is a result of changes in efficiency.     

The effective tax rate and the pretax rate of return

This paper presents new estimates of the taxes paid on nonfinancial corporate capital, on the pretax rate of return to capital, and on the effective tax rate. The basic time series show that both the pretax rate of return and the effective tax rate have varied substantially in the past quarter century.An explicit analysis indicates that, after adjusting for different aspects of the business cycle, pretax profitability was between one and 1.5 percentage points lower in the 1970s than in the 1960s. The rate of profitability in the 1960s was also about one-half of a percentage point greater than the profitability in the 7 years of the 1950s after the Korean war.Changes in productivity growth, in inflation, in relative unit labor costs, and in other variables are all associated with changes in profitability. None of these variables, however, can explain the differences in profitability between the 1950s, 1960s and 1970s.Looking at broad decade averages, the effective tax rate and the pretax rate of return move in opposite directions, lower pretax profits occuring when the tax rate is high. There thus appears to have been no tendency for pretax profits to vary in a way that offsets differences in effective tax rates.     

The relationship between risk and rate of return on capital in UK industry

Quarterly data from the International Finance Statistics of the international Monetary Fund is used to test the long-run implications of the neoclassical stochastic growth model for ten OECD countires – Canada, France, Germany, Italy, the Netherlands, Norway, Switzerland, Japan, the United Kingdom and the united States. In doing so, Johasen's maximum likelihood approach for estimating and testing long-run stedy-state relations in multivariate vector autoregressive models is used (Johansen, S. (1988) Statistical analysis of cointegration vectors. Journal of Economic Dynamics and Control, 231 –54).     

New approach to estimating the cost of common equity capital for public utilities

The regulatory process for setting public utilities’ allowed rate of return on common equity has generally used the Gordon DCF, CAPM and Risk Premium specifications to estimate the cost of common equity. Despite the widely known problems with these models, there has been little movement to adopt more recently developed asset pricing models to provide additional evidence for estimating the cost of capital. This paper presents, validates empirically and applies a general yet simple consumption-based asset pricing specification to model the risk-return relationship for stocks and estimate the cost of common equity for public utilities. The model is not necessarily superior to other models in its practical results, yet these results do indicate that it should be used to provide additional estimates of the cost of common equity. Additionally, the model raises doubts as to whether assets such as utility stocks are a consumption (business cycle) hedge.     

An evaluation of incentive regulation for electric utilities

This empirical study examines the determinants and impacts of incentive regulations introduced by utility commissions in the late 1970s and early 1980s. Rewards for generating plant utilization and low heat rates were found to have been introduced in states whose firms exhibited relatively high managerial slack (or relatively higher costs). However, the empirical results did not find that the introduction of specific cost component incentives improved overall operating cost performance.     

中国城市公共事业外部制度创新研究

中国城市公共事业无论是在理论上还是在外部制度安排上,都仍游离于市场经济体制之外.如何通过理论创新与制度创新,打破政府及公共部门对城市公共事业的行政性垄断,将城市公共事业真正融入到市场经济体制之中,改善城市公共事业投资及生产经营的外部制度环境,提高城市公共事业经营效率,仍是理论研究和制度实践亟待解决的重要课题.     

Mutual,non‐profit or public interest company? An evaluation of options for the ownership and control of water utilities

The purpose of this paper is to evaluate various organizational models for the ownership and control of natural monopolies – specifically the infrastructure of water and sewage provision in England and Wales. First, it summarizes recent discussion of who should own water assets in Britain. The paper notes the opportunity that has arisen for increased consumer involvement, and examines the relative merits of three models that have been suggested as alternatives: a non‐profit trust or company, a public interest company, and a consumer mutual. Five criteria are suggested for evaluating the merits of each type: its ability to safeguard the interests of the most important stakeholder, the consumer; avoid the necessity for a heavy regulatory regime; incentivize management to manage efficiently but without ‘producer capture’; raise capital relatively cheaply; and resist pressures to demutualize. The paper agrees with the recent paper in this Journal by Morse (2000) that, in theory, the consumer mutual has advantages. It draws on Hansmann’s work that suggests consumer ownership of water would be less costly than investor‐ownership, providing there are no large conflicts of interest between different types of consumer. Hansmann’s thesis is expanded to consider the likely benefits from wider member participation, and the hidden costs of not taking members into account. It then tests out whether customers would be motivated in practice to be active members, introducing a theoretical model of what motivates members of co‐operatives and mutuals to participate. The conclusions are that provided managers and board members are committed to encouraging member participation, the consumer mutual model would work well. It would need only light regulation, would avoid producer capture, and would be able to raise capital fairly easily, both from money markets and from members. It would need legislation to prevent it from being demutualized at some time in the future. However, if a participatory corporate culture cannot be guaranteed, or if there is a risk of decline of participation over time, other options such as a non‐profit trust or a public interest company would be less risky.     

The performance and objectives of public and private utilities operating in the United States

This paper compares the production efficiency of public and private utilities to determine if a significant cost differential results from different behavioral objectives under the alternative modes of ownership. The procedure is to estimate the cost and input demand functions simultaneously while accounting for differences in input prices and technology across firms. The parameter estimates are then employed to compare the efficiency and objectives of public and private firms. The results suggest that public firms minimize cost and have 24–33% lower per unit costs than their privately owned counterpart. This cost differential appears to result from rate-of-return regulation of the privately owned firms.     

Determinants of the systematic risk of electric utilities: theory and estimation

Investors' perceptions of the risk of holding the common stocks of electric utilities are analysed on the assumption that risk depends on the covariance of shareholder returns with the market. The analysis explicitly relates risk to the sales and cost structures, growth, and regulatory environment of each electric utility. The model accounts for the effects of regulatory lag during periods of cost inflation. The model is estimated using a pooled cross-section, time-series sample of 95 electric utilities for the period 1965 to 1977. Estimates indicate that sales,cost structure and growth dominate investors' assessment of the systematic risk of individual firms. Surprisingly, differences in regulatory treatment experienced by firms have a relatively small effect on perceived systematic risk.     

Depreciation and profitability under rate of return regulation

This paper examines the widely-held notion that the regulatory approach to setting earnings equalizes the accounting and internal rates of return, and that this condition holds for any depreciation profile. The evidence suggests that the practical usefulness of this proposition for policy-making may be quite limited.This paper also examines the underlying premise—that, because of its relative constancy over time, the regulated rate of return must equal the internal rate of return—and finds that contrary to earlier suggestions, this result does not always hold in the multi-asset case.     

The nominal rate of interest, the rate of return on money, and inflationary expectations

This paper offers two modifications to the standard comparative-static analysis that help explain why nominal interest rates may either over- or under-adjust to a change in inflationary expectations, even in full general equilibrium: the inclusion of the real rate of return to money balances in commodity demand functions, and the presence of differing costs of obtaining information. In brief, the first factor may explain why nominal interest rates could over-adjust to a change in inflationary expectations, while the second may substitute for real balance effects in limiting the upward adjustment of nominal rates.     

Shephard's lemma and rate of return regulation

By counter example this paper shows that in general, Shephard's lemma cannot be used for the usual formulation of the rate of return regulated cost function. A solution to the problem is supplied.     

Stock return, risk, and legal environment around the world

This paper investigates how the legal environment in a country influences performance and risk of stock across countries at different developmental stages and of various rules of jurisdiction. Using data of 4916 stocks from 37 countries, our empirical findings confirm that equities in countries with English common law origin have higher risk premiums than those in civil law countries, particularly for countries of the French/Spanish code. The indicators representing high efficiency in law system, low corruption, strong legal protection of investors' rights, and reliable political environment are associated with low risk and high performance. The various elements of legal procedural formalism, however, have differing effects on volatility and return.     

Lifetime income and public pension: An analysis of the effect on redistribution using a two-period analysis

This paper examines the redistributive effect of public pension programs in the framework of a two-period analysis. Private saving is also considered for comparison purposes as an alternative to public pension for assuring consumption during retirement. An emphasis is placed on investigating the effect of the various formulae for the determination of both the benefit level and the contribution, with the additional purpose of examining the effect of a maximum limit. The Japanese pension systems are evaluated on the basis of the above model framework in comparison with the British system.     

Regulatory information,market expectations,and the determination of the allowed rate of return

The purpose of this paper is to explore the implicit structure of expectations involving allowed rate-of-return (ARR) determination and the role of regulatory information in related financial markets. Our approach utilizes two models, allowed rate-of-return determination and excess returns from announcement effects, to study the structure of expectations involved in public utility rate cases. Our results indicate that financial markets do not have complete information prior to the announcement of allowed rates of return and that the source of this informational imperfection may be incorrect expectations regarding the allowed rate of return.We would like to thank seminar participants at the Chinese University of Hong Kong and SUNY-Binghamton, as well as two anonymous referees, for helpful comments. All remaining errors are the responsibility of the authors.     

The economic rate of return of infrastructures and regional policy in the European Union

This paper examines the results of cost–benefit analysis (CBA) of 200 major investment projects co-financed in 1988–93 by the European Commission. The project database we have built is probably one of the few existing sets of comparable micro-data on the expected rates of return of public infrastructure and on the quality of CBA leading to its calculation. The database reveals a striking dispersion of expected rates of return around the average. Part of the large sample variance is probably a consequence more of inconsistencies in the actual implementation of CBA than of structural differences among the European Union's more economically backward regions. We offer a measurement of the quality of CBA and compare EU ex-ante data with World Bank ex-post data.     

An analysis of the consumption risk and asset returns of Chinese residents

The research on the consumption-based asset pricing theory is limited to the developed capital markets. This paper seeks to extend the research to the Chinese developing capital market. It analyzes the dynamic relationship between the Chinese residents’ consumption, stock market returns and interest rates with the CCAPM. According to the analyses of this paper, the IV regression results are mixed. However, the data can fit the model relatively well, and the empirical results fail to reject the model. Thus, the results show that a relationship between the Chinese residents’ consumption growth rates and the asset returns does indeed exist, and that the consumption volatility risk could influence the asset returns.     

零售业对外开放:现状分析及对策建议

消费是拉动我国国民经济增长的重要力量。2002年,我国全年社会消费品零售总额达到40911亿元,比上年增长8.8%。加入世贸组织后,我国零售业对外开放不仅关系到整个行业的发展,而且对我国国民经济的运行也将产生重要影响。开放的进程1992年7月以前,我国禁止外商在中国开办独资或合     

Two further aspects of some new tests for structural stability

This paper presents two extensions to Hall and Sen’s [Hall, A.R. and Sen, A. 1999. Structural stability testing in models estimated via generalized method of moments. J. Bus. Econ. Stat., 17, 335–348.] analysis of their structural stability tests. First, we approximate the p-values for the non-standard asymptotic null distribution for the structural stability test statistics proposed by Hall and Sen (1999). The p-value response surfaces are approximated by a parametric function using the methodology proposed by Hansen [Hansen, B.E., 1997. Approximate asymptotic P-values for structural change tests. J. Bus. Econ. Stat, 15, 60–67.] Second, we show how Hall and Sen’s (1999) testing methodology can be used to diagnose the source of instability in Euler equation models. To illustrate this issue, we examine the stability of the dividend capital asset pricing model proposed by Hagiwara and Herce [Hagiwara, M. and Herce M.A., 1997. Risk aversion and stock price sensitivity to dividends. Am. Econ. Rev. 87, 738–745]. Hagiwara and Herce (1997) estimate the model using annual data from 1889–1994 and find the model is not rejected using the over-identifying restrictions test. Using the same data, we find some evidence of structural instability in the model. Interestingly, the tests reveal that the model appears to be correctly specified for the period up until 1942 but incorrectly specified in the post 1942 part of the sample.