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Natural monopolies are not subject to the market-based principle of competition. Consequently, it is necessary to control companies in such monopoly positions with regard to their pricing. In the future, it will become more and more important to consider a possible change in the regulation regime when the future-oriented costs of equity - both in terms of price regulation and for conducting capital market-oriented business valuations - are to be determined. Based on the principal-agent problem, the book explains this topic. The effect of a change in the regulation regime is presented in the form of two studies: an international secondary analysis of the effects on cost of equity based on event studies of the Anglo-Saxon area and a primary analysis based on the Austrian regulation policy for electricity and gas supply systems. The two studies arrive at similar results: The change from a rate-of-return regulation to incentive regulation systems leads to a significant increase in systematic risk.

Inhaltsverzeichnis

Frontmatter

Chapter 1. Introduction

Abstract
The market-based fundamental principle of competition is not present for natural monopolies. For this reason, monitoring corporations that possess a natural monopoly is necessary within the scope of price setting, in order to minimize welfare loss due to the lack of effect from competition. Network infrastructures, such as electricity and gas networks, are classic examples of natural monopolies.
Michael Hierzenberger

Chapter 2. Capital Market-Based Calculation of the Cost of Equity

Abstract
To conduct cash flow-based business valuations, the projection of future cash flow is necessary. The future cash flow is to be evaluated by means of an appropriate discount interest calculation.
Michael Hierzenberger

Chapter 3. Methods of Price Regulation

Abstract
There are essentially two methods for defining fair prices in regulated industries. The first method, known as rate of return regulation, routinely fixes prices in the amount of the actual costs.1,2 The second method, known as RPI-X regulation, defines prices on the basis of a price or profit formula.3 In this case, the price of the current period consists of the price of the previous period subtracted by the mandatory efficiency boosts that take the form of price surcharges and price increases, in order to compensate for the general price escalation.4 In the following, both of these different systems will be defined more carefully. On the basis of the principle agent theory, a statement is made in Sect. 3.2 about which different incentive effects both of these systems have intrinsically for boosting efficiency in providing a service.
Michael Hierzenberger

Chapter 4. Empirical Secondary Data Analysis

Abstract
Chapter 4 examines whether decisions from regulatory agencies on future regulation parameters, contingent on the applied regulatory system (ROR-regulation or RPI-X regulation), have significant differences. Each decision to be reached by the regulatory agency or the complexity of the calculation is defined as the regulation parameter. The economic consequences for price-regulated companies resulting from these decisions by the regulatory agency are identified as regulatory risk. Regulatory risk is a component of unsystematic risk. Unsystematic risk is primarily of significance only for investors that are not completely diversified. For investors that are completely diversified, the systematic risk component is not relevant for business valuation.
Michael Hierzenberger

Chapter 5. The Primary Empirical Study

Abstract
Building on the results from Chap. 4, this chapter analyzes how risk from the companies investigated is effected by the regulatory system shift in the Austrian electric power supply industry. For this purpose, the database used for this investigation and the hypotheses to be tested are presented in Sect. 5.1. In Sect. 5.2, the inference-statistical results are presented and interpreted for the structural break analysis. The results of the events study are presented an interpreted in Sect. 5.3.
Michael Hierzenberger

Chapter 6. Summary of the Work

Abstract
Chapter 2 presented the calculation of the costs of equity in regulated companies as to its intrinsic meaning – on one hand for determining an appropriate cost of capital and on the other as a prognosis basis for estimating future cash flow.
Michael Hierzenberger

Backmatter

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