The economic regulation of major energy infrastructure assets (e.g., oil and natural gas pipelines and electricity transmission) determines how utilities set rates and therefore generate earnings—significantly impacting the valuation of regulated firms. This plays a significant role in the choices investors make when committing capital to those assets. But the regulatory risks investors consider differ widely between jurisdictions and industries in which the assets reside. Regulatory due diligence, therefore, represents a critical element for investors when evaluating the purchase of a regulated asset.
In the United States, regulation of energy infrastructure emerged more than a century ago—originating in the nation's first regulation of investor-owned railroads in the late nineteenth century. By the 1940s, the US had established the foundations of regulation of investor-owned utilities. In contrast, regulation in the United Kingdom developed much more recently, beginning with government ownership in the 1930s and the privatization of state-owned utilities in the 1980s.
Differences in the initial impetus for regulation (e.g., promoting competition by prohibiting undue discrimination or protecting consumers served by utility monopolies) lead to different regulatory considerations. The differences in history and experience result in divergent regulatory institutions, which have a material impact on the approach of investors considering purchasing assets in each country. In this white paper, Director Laura T.W. Olive and Senior Consultant Soren Christian describe the regulatory institutions in the US and the UK and provide specific examples of how different approaches impact the risks associated with investment.
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