Disallowances and Overcapitalization in the U.S. Electric Utility Industry

Douglas, Stratford; Garrett, Thomas A.; Rhine, Russell M.

doi:10.20955/r.91.23-32

Cited by 5 publications

(11 citation statements)

References 22 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…In Equation (), the sign of

dK/ds_{K}

critically hinges upon the relation between

\phi \cdot s_{K}

and

G_{K}

. Under the assumption that the post disallowance rate of return

\phi \cdot s_{K}

exceeds the marginal revenue product of capital

G_{K}

(as in Douglas et al., 2009), the ratio

dK/ds_{K}

is negative and the AJ effect holds. However, this assumption does not hold in general, and has no empirical support in the context of capital investments that improve the resilience of the grid.…”

Section: Analytical Modelmentioning

confidence: 99%

“…Other models using an AJ-type characterization examine the effect of relaxing model assumptions on the results. For example, Klevorick (1973) and Peles and Stein (1976) consider the effect of uncertainty, Bailey (1973) and Davis (1973) analyze regulatory lag, Gollop and Karlson (1978) and Joskow and MacAvoy (1975) discuss fuel adjustment clauses, and Douglas et al (2009) account for regulatory cost disallowances on capital.…”

Section: Effect Of Rate-of-return Regulation On the Decisions Of Regu...mentioning

confidence: 99%

See 1 more Smart Citation

Leader–follower equilibria to examine investment decisions in grid resilience‐enhancing measures

Prete

Radhakrishnan

2022

Risk Analysis

View full text Add to dashboard Cite

Large-area, long-duration power outages are increasingly common in the United States, and cost the economy billions of dollars each year. Building a strategy to enhance grid resilience requires an understanding of the optimal mix of preventive and corrective actions, the inefficiencies that arise when self-interested parties make resilience investment decisions, and the conditions under which regulators may facilitate the realization of efficient market outcomes. We develop a bi-level model to examine the mix of preventive and corrective measures that enhances grid resilience to a severe storm. The model represents a Stackelberg game between a regulated utility (leader) that may harden distribution feeders before a long-duration outage and/or deploy restoration crews after the disruption, and utility customers with varying preferences for reliable power (followers) who may invest in backup generators. We show that the regulator's denial of cost recovery for the utility's preventive expenditures, coupled with the misalignment between private objectives and social welfare maximization, yields significant inefficiencies in the resilience investment mix. Allowing cost recovery for a higher share of the utility's capital expenditures in preventive measures, extending the time horizon associated with damage cost recovery, and adopting a storm restoration compensation mechanism shift the realized market outcome toward the efficient solution. If about one-fifth of preventive resilience investments is approved by regulators, requiring utilities to pay a compensation of $365 per customer for a 3-day outage (about seven times the level of compensation currently offered by US utilities) provides significant incentives toward more efficient preventive resilience investments.

show abstract

“…In Equation (), the sign of

dK/ds_{K}

critically hinges upon the relation between

\phi \cdot s_{K}

and

G_{K}

. Under the assumption that the post disallowance rate of return

\phi \cdot s_{K}

exceeds the marginal revenue product of capital

G_{K}

(as in Douglas et al., 2009), the ratio

dK/ds_{K}

Section: Analytical Modelmentioning

confidence: 99%

Section: Effect Of Rate-of-return Regulation On the Decisions Of Regu...mentioning

confidence: 99%

Leader–follower equilibria to examine investment decisions in grid resilience‐enhancing measures

Prete

Radhakrishnan

2022

Risk Analysis

View full text Add to dashboard Cite

show abstract

“…Furthermore, a regulator's disallowance (denial to recover) of some part of the capital costs further exacerbates the A-J effect. Since a portion of capital spending is excluded from the profit calculation, firms will invest more in capital to maintain or increase profits (Douglas et al (2009)). Using the example of the NO x Budget Program aiming to limit NO x emissions in eastern states, Fowlie (2010) shows that the power plants' environmental compliance decisions were influenced by RoR regulation.…”

Section: Investment In Capacitymentioning

confidence: 99%

Environmental implications of market structure: Shale gas and electricity markets

Knittel¹,

Μεταξόγλου

Trindade

2019

International Journal of Industrial Organization

View full text Add to dashboard Cite

We examine the environmental implications of market structure using the exogenous variation in the price of natural gas paid by U.S. electric power producers in the aftermath of the shale boom. We find that electric power producers were more responsive to fuel prices in vertically integrated markets than in restructured markets, and we explore the underlying factors driving this heterogeneity in responses. Although differences in the capacity of the most efficient gas power plants between the two market structures are the most important factor, we consider others. The heterogeneity in the response of power plant operators to fuel prices has material implications for carbon dioxide emissions.

show abstract

“…If a regulator approves as prudent a series of network investments at the time of commitment, and then subsequently deems such assets as stranded, capital markets (i.e. both debt and equity capital markets) will interpret policy as opportunistic and heighten the cost of capital in future regulatory periods, produce investment frictions and potentially block investment (Baumol & Sidak, 1995;Woo et al 2003;Douglas et al 2009;Kind, 2013).…”

Section: The Regulatory Compact and Arguments For Full Recoverymentioning

confidence: 99%

“…Regulators have neither the resources, nor responsibility, to create and guarantee investment plans, and cannot be expected to match the expertise and resources of utilities, nor come close to second-guessing what constitutes a prudent investment program (Navarro, 1996;Maloney & Sauer, 1998;Douglas et al 2009). Mistakes made by regulators approving apparently prudent investments are likely to be a contributing factor, not a primary cause of stranded assets and to say otherwise would be re-writing history (Pierce, 1984).…”

Section: Full Vs Partial Recovery Of Stranded Assetsmentioning

confidence: 99%

Regulated electricity networks, investment mistakes in retrospect and stranded assets under uncertainty

Simshauser

Akimov

2019

Energy Economics

View full text Add to dashboard Cite

The run-up in the capital stock was driven by forecast demand growth and a tightening of reliability standards. But demand contracted from 2010-2015. With a rising RAB, contracting demand and a regulated revenue constraint, an adverse cycle of sharply rising tariffs and falling demand appeared to be emerging. Some networks were characterised by significant investment mistakes in retrospect, and perhaps unsurprisingly, various consumer groups and regulatory bodies argued assets should be stranded or written-off completely and network tariffs reduced. From 2015-2018, energy demand increased once again. In this article we present a method for dealing with stranded assets under uncertainty; rather than permanently stranding assets that fail a used and useful test, we reorganise the financial and economic affairs of a template network utility and "Park" excess capacity, issue credit-wrapped bonds to temporarily finance the stranded capital stock, then re-test the Parked Assets at the end of each five-year regulatory determination. Parked Assets can then be "Un-Parked" and returned-to-service in line with connections growth, load growth, or both. The most interesting result is the immediate reduction in network tariffs, and a more stable trajectory under our generalised assumptions. Cambridge Working Papers in Economics Faculty of Economics www.eprg.group.cam.ac.uk Regulated electricity networks, investment mistakes in retrospect and stranded assets under uncertainty EPRG Working Paper 1828

show abstract

Disallowances and Overcapitalization in the U.S. Electric Utility Industry

Cited by 5 publications

References 22 publications

Leader–follower equilibria to examine investment decisions in grid resilience‐enhancing measures

Leader–follower equilibria to examine investment decisions in grid resilience‐enhancing measures

Environmental implications of market structure: Shale gas and electricity markets

Regulated electricity networks, investment mistakes in retrospect and stranded assets under uncertainty

Contact Info

Product

Resources

About