Speculative Undertakings: Rate Regulation as a Branch of Corporate Finance

44 Pages Posted: 24 Jan 2018 Last revised: 25 Aug 2018

James Ming Chen

Michigan State University - College of Law

Date Written: January 17, 2018

Abstract

The law of regulated industries, particularly the legislative command that the government ensure “just and reasonable rates” for regulated services, is a highly specialized application of financial economics. Ratemaking, to put it bluntly, represents a regulatory exercise in capital asset pricing. As a matter of economics, this article describes ratemaking as a variation on the theme of uncertainty in mathematical finance. As a matter of law, this article describes legal principles guiding the determination of the rate of return on property dedicated to public use. It closely analyzes two regulatory valuation methods derived from the 1923 Bluefield Water Works decision (“attracting capital” and “comparable earnings”), as well as a third approach based on the capital asset pricing model. Discretionary elements in rate regulation make it impossible to wholly alleviate uncertainty in the pricing of utility infrastructure. Utility rate regulation therefore constitutes a speculative undertaking in its own right.

Suggested Citation

Chen, James Ming, Speculative Undertakings: Rate Regulation as a Branch of Corporate Finance (January 17, 2018). 35 Yale Journal on Regulation 779-822 (2018). Available at SSRN: https://ssrn.com/abstract=3103627 or http://dx.doi.org/10.2139/ssrn.3103627

James Ming Chen (Contact Author)

Michigan State University - College of Law ( email )

318 Law College Building
East Lansing, MI 48824-1300
United States

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