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.     

Optimal algorithms and lower partial moment: ex post results

Portofolio management in the finance literature has typically used optimization algorithms to determine security allocations within a portfolio in order to obtain the best trade-off between risk and return. These algorithms, despite some improvements, are restrictive in terms of an investor's risk aversion (utility function). Since individual investors have different levels of risk aversion, this paper proposes two portfolio-optimization algorithms that can be tailored to the specific level of risk aversion of the individual investor and performs ex postevaluation tests of the algorithm performance.     

A case for water utilities as cooperatives and the UK experience

This article explores the creation of consumer cooperatives as a means of privatizing water utilities. The first section examines the structure of ownership and sets out Hansmann's theoretical basis for determining which category of persons is most efficiently assigned ownership. The section extends the discussion of market contracting costs by considering the externalities and social costs associated with a water utility. The heart of the paper is the second section which applies the theory of efficiently assigned ownership to the case of water utilities. The third section briefly reviews the literature on the relative efficiency of private and public utilities and also succinctly applies the theory of the firm to the question of vertical integration in the case of water utilities. The fourth section discusses the UK's experience with water utilities. The final section draws together the paper's conclusions.   The application of Hansmann's general theoretical scheme for assigning ownership leads to the conclusion that water utilities should be consumer cooperatives. Consumer-owned utilities would confront lower market contracting and ownership costs, than would investor-owned utilities. Additionally, the social costs and externalities that are particular to water are better left to consumers who are more prone to take them into account in their decisions.     

Optimal reinsurance and dividend for a diffusion model with capital injection: Variance premium principle

This paper considers the optimal dividend problem with proportional reinsurance and capital injection for a large insurance portfolio. In particular, the reinsurance premium is assumed to be calculated via the variance principle instead of the expected value principle. Our objective is to maximize the expectation of the discounted dividend payments minus the discounted costs of capital injection. This optimization problem is studied in four cases depending on whether capital injection is allowed and whether there exist restrictions on dividend policies. In all cases, closed-form expressions for the value function and optimal dividend and reinsurance policies are obtained. From the results, we see that the optimal dividend distribution policy is of threshold type with a constant barrier, and that the optimal ceded proportion of risk exponentially decreases with the initial surplus and remains constant when the initial surplus exceeds the dividend barrier. Furthermore, we show that the optimization problem without capital injection is the limiting case of the one with capital injection when the proportional transaction cost goes to infinity.     

Importance and threat as determining factors for criticality of natural capital

An important issue in the debate about the use and conservation of natural ecosystems is the degree to which these ecosystems and their functions should be considered ‘critical’. This paper presents some guidelines to determine the criticality of natural capital, based on two main criteria. The first criterion is the ‘importance’ of natural ecosystems (ecological, socio-cultural and economic) and the second is the degree of ‘threat’ based on the quantity and quality of the (remaining) natural areas in a given region. It is argued that the two criteria are complementary and need to be taken into account simultaneously when determining the criticality of natural capital. Finally, the paper presents and discusses some possibilities for the development of a (critical) natural capital index for Europe.     

Multilateral currency substitution and capital flows as sources of instability in the soe demand for money function — A case study

Using monthly data for Ireland we test the hypothesis that the combined effects of currency substitution and capital mobility renders the demand for money function subject to instability over time. The empirical evidence supports the view that both “the” expected exchange rate change, giving rise to currency substitution, and the latter as a component, along with “the” foreign interest rate, of the gross yield on foreign currency-denominated assets, giving rise to capital mobility, are important determinants of the domestic demand for money. Their inclusion as arguments yields a money demand function which is more stable than if they are (incorrectly) excluded.