K. E. Hughes II
Louisiana State University
Charlene Henderson
The University of Texas at Austin
Abstract: This study examines how investors value future environmental liabilities of electric utility firms given the rate-regulated business climates in which they operate. We anticipate the markets valuation will be conditioned on the constraints operative in the regulatory climate faced by the utility. The environmental liabilities examined result from Superfund and Clean Air Act legislation.The studys results reveal that investors priced exposure to future clean air compliance costs by discounting the average common share price by 10 to 13 percent for utilities operating in nonfavorable (pro-ratepayer or neutral) regulatory climates; but utilities with similar exposure operating in favorable (pro-shareholder) regulatory climates experienced no discount to share price. Moreover, when the measure of regulatory climate is refined into three categories (unfavorable, neutral, and favorable), the evidence suggests that the market discount for exposure to future air pollution costs is equally negative for firms in neutral and unfavorable regulatory climates. In contrast to the importance of liabilities for clean air costs, exposure to Superfund cleanup costs was not associated with a discount to share price either for firms in nonfavorable or favorable regulatory climates.
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