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Bridge over ocean
1 November 1983 Financial Analysts Journal Volume 39, Issue 6

The Regulatory Environment for Public Utilities: Indications of the Importance of Political Process

  1. Wallace N. Davidson
  2. P.R. Chandy

The quality of utility regulation in various states is of importance not only to the utilities themselves, but to investors, regulators and consumers. Many investment advisory services provide rankings of the quality of regulatory environment. An analysis of the factors that go into determining these rankings indicates that favorable regulation involves minimum regulatory lags, authorization of a high percentage of the revenue increases requested by utilities, allowance of fuel adjustment clauses and allowance of construction work in progress in the rate base.

Of all the variables studied, however, the single most important factor determining whether a regulatory environment is viewed as favorable or unfavorable turned out to be whether the state utility commissioner is elected or appointed. States that appoint their commissioners tend to be perceived as having a higher quality of utility regulation. Obviously, the political process behind regulation warrants careful study by investors.

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