Valuation implications of regulatory climate for utilities facing future environmental costs

Abstract This study analyzes the interrelation between the quality of the rate-regulatory process (regulatory climate) and the firm's exposure to future environmental liabilities using a sample of U.S. electric utilities during a period of elevated environmental exposure. We conjecture that investors value these future costs through a lens that incorporates the quality of the firm's regulatory climate. Our results indicate investors discount share price by 8 to 10% for 85% of the sample's investor-owned utilities, dependent upon regulatory quality. In addition to raising an explicit disclosure issue, these valuation results, more importantly, raise societal implications for an industry that will be most heavily impacted by any future regulatory restrictions of carbon dioxide (CO 2 ).