Measuring Uncertainties in Energy Companies Caused by Governmental Regulation: The Role of Information Theory

Abstract

The increasing importance of governmental regulation in strategic sectors of the economy, particularly in the energy business, impacts on competitive markets. Uncertainties about governmental regulation and arbitrary decisions increase global risk levels for energy companies. In this paper we propose and demonstrate the utility of some concepts inspired in the Information Theory to analyze regulatory risk in energy companies. With the stock prices of selected energy companies we calculate the data series of rates of return. These continuous sources of daily returns are transformed (quantifying) into discrete ones in order to evaluate entropies using a discrete source model. We analyze the sensitivity of the quantum step of the quantizer and evaluate the entropy of different records, which include information from gas and electricity utilities for ten consecutive years. Finally, the short-time or sliding entropy concept to detect risk events caused by uncertainties or unexpected regulatory changes is introduced. Results confirm lower levels of risk in those countries where the regulatory framework is much more stable and predictable. The proposed methodology provides an objective comparison or benchmark between different regulatory systems by observing the stock prices evolution of the companies under such regulations.