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Financial Planning in a Regulated Environment

Published online by Cambridge University Press:  06 April 2009

Ezequiel L. Machado  and
Willard T. Carleton
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Extract

Recent economic research efforts in rate of return regulation of public utilities have for the most part been couched in a static, steady-state framework, “Averch-Johnson” hypotheses being the most obvious examples [3]. Nevertheless, standard classical microeconomic analysis of rate of return regulation seems to have two important drawbacks: first, it does not address itself to multiperiod relationships; and secondly, it cannot be represented in current-practice financial terms. This paper first outlines rate of return regulation as typically practiced. It then describes the essential features of a model designed to examine intertemporally the financial and capital expansion decision tradeoffs a public utility faces given corporate, institutional, and regulatory constraints. Decision tradeoff questions have assumed substantial policy importance in recent years not only because of the ambiguities in rate of return regulation effects conceptualized in the Averch-Johnson literature but because of the behavioral (occasionally legal) importance of purely financial constraints, such as interest coverage requirements, on corporate investment and financing choices.

Type
VII. Financial Planning
Information
Journal of Financial and Quantitative Analysis , Volume 13 , Issue 4 , November 1978 , pp. 759 - 777
Copyright
Copyright © School of Business Administration, University of Washington 1978

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References

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