© 2000 John Petroff

1)- Regulated industries

Companies in a number of industries are or were subject to control by governmental agencies over their pricing and profits. This is true for most utilities: electricity, water, natural gas distribution, telephone and transportation. Government supervision is intended to assure an adequate level of service at non-exorbitant monopolistic prices. To assure that companies will continue to expand their operations in line with a growing demographic and economic needs, regulations allow companies a "fair return" that is intended to be sufficient to attract investors. In some countries, some of these sectors are not just controlled but owned by government.

Evidence showed that government control was causing more harm than good, and that companies had a self-interest in being regulated because that kept competitors away from their markets. Consequently, in the United States and in many other countries, most of these industries have been or are in the process of deregulation or privatization because competition can (or is supposed to) lower prices more than regulation.

Table T-13.12, Net Profit Margin % in eight US sectors by size of sales in 1999, shows the before tax net profit margin of eight sectors. Utilities (electric, water and gas) have by far the highest net profit margin with 9.68% which is more than twice the margin of the next most profitable sector with 4.78%. (That second most profitable sector, transportation, happens to include local transportation which is still regulated in the United States.) However, utility companies must carry a very large fixed investment made of plants, distribution pipes and wires. As shown in chapter 9, they have the lowest total asset turnover ratio of less than one, which is three times less than the other sectors. Consequently, their ROA and ROE are lower than that of all other sectors. In Table T-13.18, ROE in eight US sectors by size of sales in 1999, ROE of utilities is only 12% in 1999, the lowest of all sectors. Table T-13.13 presents aggregate income and total assets, and ROA for the electric and gas industries for selected years of the past 40 years. The table shows that ROA for the electric and gas industries has remained very steady at around 4%, even as regulations was removed in the mid 1980's in the United States. One may conclude from the stability of ROE that either government controls had little impact of ROE, or that company performance tends to be affected by habits.

See review questions Q-13D1.1 through Q-13D1.3.