Thesis (M.A.)--Virginia Polytechnic Institute and State University, 1994. / Vita. Abstract. Includes bibliographical references (leaves 51-53). Also available via the Internet.

Previous research has shown that the asset pricing model of Sharpe, Litner and Black fails to capture the relationship between market β and average return. This previous work showed that the relationship between β and average return was flat. Subsequently it was shown that a strong relationship between book-to-market equity and stock price returns existed. It has also been shown that book to market equity has strong roots in economic fundamentals. Utilities have historically used betas to justify rate increases I developing rate structures that meet the rate of return demands for investors given the risk profiles that the company betas suggest. Realizing that low betas argue against large rate increases l utilities have turned to other avenues to justify higher returns. The suggested relationship of book-to-market equity and average stock returns would provide utilities with a new argument. This thesis will show that the search for a risk proxy in the rate of return relationship for the electric utility is not resolved. The relationship reported between book-to-market equity and stock price returns does not appear to be statistically significant in the electric utility sector and extreme caution is advised in using this empirical model to predict or explain stock price returns. / Master of Arts

This dissertation investigates the perceived riskiness of electric utilities based on their mix of residential and industrial customers. While previous studies have attempted to develop a simple measure of the total riskiness of individual customer classes, this study examines the relative riskiness of the total utility as impacted by customer mix. Because the cost of risk is an element in the determination of the utility's revenue requirement, it impacts the set of optimal tariffs derived from a constrained welfare-maximization problem. The null hypothesis that investors do not base their perception of the riskiness of a utility on the customer mix is tested against the alternatives that residential customers decrease and that industrial customers increase the perceived riskiness of a utility. The hypothesis is examined using cross-sectional data for 1981. The weighted-average, after-tax cost of capital is used to measure the relative riskiness of the utility. In addition to the customer mix variables, the explanatory variables include operational and regulatory variables. The analysis provides support for the hypothesis that investors do not differentiate the riskiness of a utility based on the size of the residential class. Further, the analysis permits rejection of the alternative hypothesis that investors perceive a utility to be more risky when its customer mix is heavily industrial. The results suggest that, in fact, investors may associate greater risk with an absence of industrial customers. / Ph. D.