The Illinois Commerce Commission’s Pro Forma Adjustment Rule: An Event Study of Regulatory Decision-Making

Authors

  • Karl McDermott University of Illinois Springfield
  • Carl Peterson University of Illinois Springfield

Keywords:

Public utilities, Regulation, Electricity,

Abstract

Public utilities’ earnings are inherently linked to decisions of the regulatory body. When regulators make decisions that are unexpected or that cause additional risk to shareholders one expects that such decisions will have an effect on the price of the utility’s stock. In 2010 the Illinois Commerce Commission, the regulatory body that sets electric utility rates in Illinois, made a dramatic change in the manner in which it applied an accounting rule, the pro forma adjustment rule, causing the rates for Ameren Illinois Utilities to be substantially less than otherwise would be the case. If this decision provided information to investors, we expect the Ameren stock price to react to the decision. Using a single-firm, single-event methodology we find limited evidence that this one event had an effect on daily abnormal returns to the Ameren Corporation’s stock. We also discuss possible reasons for these results.

Author Biographies

Karl McDermott, University of Illinois Springfield

Karl McDermott is currently the Ameren distinguished professor of business and government at the University of Illinois, Springfield and a special consultant to National Economic Research Associates, Inc. He received his Ph.D. in economics from the University of Illinois at Urbana-Champaign. Dr. McDermott has been working in the field of public utility regulation for thirty years with experience in nearly every facet of the regulation of public utilities. From 1999 through March 2008, he was a vice president at NERA in its Chicago office. Prior to joining NERA, Dr. McDermott served as a commissioner on the Illinois Commerce Commission. He is currently on the faculty of the Institute for Public Utilities at Michigan State University where he is an invited lecturer at several of the Institute’s regulatory studies programs.

Carl Peterson, University of Illinois Springfield

Carl Peterson is an instructor in the accountancy department at the University of Illinois Springfield. He received his Ph.D. in economics from the University of Illinois at Chicago. His current research interests include regulatory institutions, transitioning markets for public utility services, and financial decision-making of electric utilities. He has published in The Electricity Journal and Natural Gas and Electricity as well as several edited volumes.

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Published

2012-12-05

Issue

Vol. 3 No. 1 (2012)

Section

ABR Journal Articles

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