Date of Award
Doctor of Philosophy
Public Affairs and Administration
Dr. Peter Kobrak
Dr. Michael Payne
Dr. Myron Ross
This study presents an approach that is consistent with regulatory standards of fairness, and enables the Public Service Commission staff to determining "benchmark" rates of return for Michigan's small telephone utilities. It applies only where they are either subsidiaries of holding companies or independently operating but whose securities are not publicly traded.
The methodology developed in this research is couched in the capital asset pricing framework and is powerful enough to capture the parent-subsidiary relationship to the ultimate determination of benchmark rates of return for utilities that have similar risks.
To evaluate the methodology for consistency with the regulatory standards, first, a set of descriptive examples was used; second, the approach was applied to the determination of return rates on equity capital of small and large telephone companies. The approach adopted in this research is general and can be applied to electric as well as natural gas utilities. In addition, tests of hypotheses between the expected, authorized, and earned rates of return were conducted using the student's t-test.
The major findings of the study are: (a) the traditional double leverage approach advocated by its proponents and the independent company approach advocated by its proponents are, in general, inconsistent with the regulatory standards of fairness; (b) if the unlevered beta of parent's capital structure is equal to the levered beta of parent's consolidated capital structure, it is immaterial whether one uses the parent's capital structure or parent's consolidated capital structure for the estimation of cost of equity capital of a subsidiary; (c) the study provides a method for estimating the subsidiary's beta even if its securities are not publicly traded; (d) the benchmark rate of return for 32 independently operating telephone companies, based on a benchmark capital structure, 60% and 40% equity, is found to be 13%; and (e) the null hypothesis that there is no difference between the means of earned and authorized rates for 32 companies is rejected at the 1% level of significance, whereas for the eight subsidiaries of holding companies, the null hypothesis is accepted.
Rao, Gondy Bhaskara, "Determination of a "Benchmark" Rate of Return for Regulated Small Telephone Utilities in the State of Michigan" (1988). Dissertations. 2162.