Capital structure of Regulated Firms in the utilities sector

This thesis explores how capital structure decisions in regulated utilities are shaped by financial incentives, institutional frameworks, and interactions with regulators. While traditional financial theory provides useful insights into capital choices, it doesn’t fully account for how utilities firms behave in environments of strong regulation. In sectors like water and energy transport, debt isn’t just a tool for financing, it’s also used strategically to influence regulatory outcomes. To investigate this, the study combines theoretical insights with institutional analysis and real-world data from selected utilities in the UK and Italy. The findings reveal that UK utilities tend to maintain higher and more stable levels of debt. This is largely due to liberalisation, pressure from investors, and a regulatory approach that has historically been more permissive. However, in recent years, UK regulators such as Ofwat and Ofgem have taken steps to strengthen financial oversight, introducing measures like gearing limits, cash lock-up provisions, and capital requirements tied to licences. In contrast, Italian utilities generally show lower and more varied debt ratios. These are influenced by a mix of public and private ownership, less regulatory emphasis on capital structure, and a focus on long-term growth and service quality improvements. The research highlights how deeply capital structure is tied with institutional and political dynamics. It illustrates feedback loops where firms make leverage decisions not just based on market conditions, but in anticipation of how regulators might respond. This creates risks of moral hazard and financial instability, and challenges in aligning private incentives with the public good. Based on these insights, the thesis offers policy recommendations aimed at improving regulation of capital structure, limiting strategic use of debt, and strengthening resilience in essential service sectors. Ultimately, it argues that regulators should treat capital structure not as a side issue, but as a central part of financial oversight and public interest protection.