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Abstract:
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This thesis examines the link between Return on Equity (ROE) for natural gas pipelines and their investment in infrastructure. ROE is the level of profits that a regulated utility is allowed to earn on its capital base. Many policy decisions regarding natural gas and other types of infrastructure assume a positive causal relationship between allowed returns and investment levels. The Federal Energy Regulatory Commission (FERC) has recently raised ROEs relative to capital costs for gas transmission to incenting new investment. This thesis hypothesizes that such a link is not strong, as other factors, including citing considerations, regulatory uncertainty and fuel costs and availability, also effect investment decisions.
This data set includes estimated ROEs providing by FERC Trial Staff, publicly available FERC Form 2 data on gross plant investment, Standard and Poors credit ratings, and a variable for pipeline region. It includes 32 of the 40 largest US natural gas pipelines for 2001 through 2005. These variables as well as the one for region are utilized in a multivariate regression, with relative (percent change) gross plant investment the dependent variable. After controlling for credit rating and region, the relationship between ROE and gross plant investment is positive, linear, statistically significant and of moderate magnitude, indicating that higher ROE values are correlated with greater investment. However, based on the low R-squared values produced, ROE has very limited explanatory power on investment levels, indicating significant variation within the sample, potential data insufficiencies, and the importance of other factors in investment decisions. |