Modelling the effects of regulatory discretion: Carsberg vs Spottiswoode

This paper attempts to measure the effect on financial markets of two important regulatory events in the British telecommunications and gas industries namely the 1991 Duopoly Review and the 1996 Transco Price Review. These events were chosen because it is widely believed that the individual industry regulators handled them very differently. The expected volatility of the share returns for these two companies is modelled as an ARCH representaion and it is found that the conditional variance of share returns in British Gas was higher after the Transco Price Review. The share returns of British Telecommunications exhibit a lower expected volatility. It is concluded that these results support the contention that the high level of discretion accorded to British regulators may increase the cost of capital for regulated firms.