Deregulatory Takings and the Regulatory Contract

THE EXISTENCE of efficient capital markets raises several important questions concerning stranded costs and deregulatory takings. After briefly reviewing the implications of capital market efficiency, we examine whether the regulated firm has already been compensated for stranded costs, when claims of deregulatory takings are ripe for adjudication, whether it truly serves the private interests of competitive entrants to oppose stranded cost recovery by the incumbent regulated firm, and whether a principled argument against stranded cost recovery can be predicated on the political objective of minimizing the size of the regulatory state. Finally, we discuss the securitization of stranded costs.

A BRIEF REVIEW OF THE THEORY OF EFFICIENT CAPITAL MARKETS

A capital market is said to be “efficient” if the strategy of “buy and hold” cannot be outdone by buying and selling securities on the basis of various sorts of information. The earliest efficient-market studies—all empirical analyses of the serial properties of asset prices—examined whether past price and volume information could be used to predict future prices. The first important paper asked whether security prices exhibit zero serial correlation or, alternatively, a random walk. The research, conducted mostly by statisticians, continued in that same vein until the 1950s. The explanation for the observed results was so simple that it defies identification with any one theorist: There is no serial correlation in returns on securities (nor any predictable patterns in prices) because, “If we knew that the price would rise, it would have already risen.”