Risk and regulation in water utilities: a cross-country comparison of evidence from the CAPM

<Para ID="Par1">This paper addresses a core issue for the regulated utility: what are the risks taken by investors in companies that supply a product whose supply is regulated? Prior research on returns of regulated water supply and distribution companies concluded that regulation interacts significantly with equity returns and that the systematic risk and hence required returns of water utilities equity were low and decreasing over time (Buckland and Fraser, J Bus Financ Account 28(7–8):877–904, <CitationRef CitationID="CR20">2001</CitationRef>). The current research analyses the returns on securities issued by regulated water companies in the differently regulated economies of the UK and the US, using data from 1980 to 2010. Mirroring the results from the 1990s, the evidence suggests that UK regulators have chronically overestimated the systematic risks borne by investors in water utilities, resulting in lax pressure on permitted returns and higher prices than are needed to provoke efficiency. The analysis also confirms that there are striking differences between the regulatory risks and patterns of returns for private sector water utilities in the UK and the US. Copyright Springer Science+Business Media New York 2015