Abstract

THE CHOICE OF OFFERING method, competitive bidding or negotiated offering, for the issuance of new securities by public utilities is subject to approval by its regulators. The Securities and Exchange Commission (SEC) regulates security issuance by utility holding companies as stipulated by the Public Utility Holding Company Act of 1935. Rule 50 requires that, unless a waiver is granted, sales of all securities of a holding company or subsidiary company be accomplished through competitive bidding procedures. The Federal Energy Regulatory Commission (FERC) requires competitive bidding on all new securities issued by electric utilities.' Each state regulatory agency can formulate its own policy concerning security issuance. Most states that have the legal authority to require competitive bidding do require it. A fair conclusion of the prevailing regulatory environment is that regulators believe that competitive bidding will lead to lower overall interest cost. Three recent studies have investigated this question. Based on a pooled sample of industrial and public utility debt offerings for the period January 1974 to April 1978, Sorensen [5] found that competitive bidding leads to a significantly lower overall interest cost compared with negotiated offerings. In contrast, Parker and Cooperman [3], using a sample of public utility debt offerings issued between 1970 and 1974, found that competitive bidding did not necessarily result in lower cost. Fabozzi and West [1] resolve these two seemingly conflicting findings using a sample of public utility debt offerings for the period 1974 through 1976. They demonstrate that the appropriate comparison is not between negotiation and competitive bidding, per se, but rather between negotiation and the intensity of bidding competition [1, p. 324]. In addition, they show that the general level of uncertainty must be considered in investigating the least-cost offering method. In doing so, they develop a measure to proxy for market uncertainty. The purpose of this note is to provide additional empirical evidence on the importance of market uncertainty in the method of offering controversy using a sample from a more recent time period that includes a more volatile interest rate environment than in previous studies. To investigate this issue, we employ a new measure of market uncertainty as well as the measure developed by Fabozzi and West.

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