No clear consensus has emerged. Should regulators hold to a hard line?
Regulators have wrestled for decades with transactions between vertically integrated monopoly utilities and their...
equity, assets or capital employed. That is a step in the right direction because these measures recognize the existence of the balance sheet, and the need to relate earnings to the capital producing the earnings, i.e., they attempt to measure the efficiency of capital use. But they remain flawed because they do not provide information on the minimum return acceptable to the shareholder, given the risk of the business.
In Case 1 below, overall return on capital, or ROC, grows but value declines. In Case 2, overall ROC declines, but value grows.
1 Stewart III, G. Bennett, "The Quest for Value," Harper Business, 1990.
2 Ehrbar, Al, "The Real Key To Creating Wealth," John Wiley and Sons, 1998.
3 "America's Greatest Wealth Creators," Fortune, Nov. 9, 1998.
4 Mail, "Voodoo, Perhaps. Econometrics, No," Public Utilities Fortnightly, Nov 1., 1998, p. 30.
5 Haeri, Ph.D., Hossein, Matei Perussi and M. Sami Khawaja, Ph.D., "The Fortnightly 100 Revisited: Do Utility Stock Prices Reflect Operational Efficiency?" Public Utilities Fortnightly, Feb. 15, 1999, p. 36.
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