Risk and risk allocation have always been central issues in public
utility regulation. Unfortunately, the term "risk" can easily be
misrepresented and misinterpreted, especially when disconnected from
long-standing principles of corporate finance.
This book provides those in the regulatory policy community with a basic
theoretical and practical grounding in risk as it relates specifically
to economic regulation in order to focus and elevate discourse about
risk in the utility sector in the contemporary context of economic,
technological, and regulatory change. This is not a "how-to" book with
regard to calculating risks and returns but rather a resource that aims
to improve understanding of the nature of risk. It draws from the fields
of corporate finance, behavioral finance, and decision theory as well as
the broader legal and economic theories that undergird institutional
economics and the economic regulatory paradigm.
We exist in a world of scarce resources and abundant uncertainties, the
combination of which can exacerbate and distort our sense of risk.
Although there is understandable impulse to reduce risk, attempts to
mitigate may be as likely to shift risk, and some measures might
actually increase risk exposure. Many of the concepts explored here
apply not just to financial decisions, such as those by utility
investors, but also to regulatory and utility decision-making in
general.
