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Incentive vs. Conventional Regulation of New Utility Construction

Published online by Cambridge University Press:  10 May 2017

Joan K. Meyer
Joan K. Meyer*
Affiliation:
Department of Agricultural Economics, Cornell University
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Abstract

Major plant construction projects represent a large part of a typical utility's rate base and construction cost overruns are a perennial problem associated with these projects. The conventional approach to prevent overruns is direct regulatory oversight by a regulatory commission. Yet this approach fails to provide on-going incentives for the most cost effective decisions by the utility. This article contrasts an incentive method of regulation, which inversely relates the rate of return granted by the regulatory agency with the level of overruns incurred, with conventional rate regulation. A discounted cash flow simulation model is employed based on data from an electric generation project currently under construction in Central New York.

Type
Articles
Information
Journal of the Northeastern Agricultural Economics Council , Volume 13 , Issue 1 , April 1984 , pp. 103 - 111
Copyright
Copyright © Northeastern Agricultural and Resource Economics Association 

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Footnotes

The author is indebted to Robert Kalter, Richard Boisvert, and two anonymous reviewers for helpful comments and assistance. Thanks also goes to NYSEG's staff for their efficient provision of data and information. All errors, however, are the responsibility of the author.

References

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