Privatisation of Utilities and the Asset Value Problem

Privatised utilities are typically characterised by both undervaluation and underpricing. When faced with this problem, regulators have tended to employ a market value approach to determine the regulatory asset base. This paper analyses this approach and shows that any error at privatisation is magnified and that relative errors remain entrenched forever. We suggest an alternative, i.e., the regulatory agency's own estimate of the company's value and show that errors made at the time of privatisation do not have the same impact on future prices and hence far less effect on the potential sale price. JEL Classification: L33, L51