Cost of capital to public utilities

Thesis/Dissertation · Thu Jan 01 04:00:00 EST 1987

OSTI ID:5014684

Hsu, H Y.C.

The goal of rate-of-return regulation is to preserve but not enhance the value of the utility. Current practices fail to achieve this goal since they are not derived based upon equilibrium models of valuation. This thesis derives an approach that is consistent with the valuation models. This thesis applies the positive theory of valuation developed in finance to establish normative implications for the regulators involved in utilities rate of return regulation. It was demonstrated within a theoretical framework in this thesis that utilities should be allowed to earn exactly their weighted average cost of capital on the capital contributed so as to maintain the shareholders' wealth. The market-valuation approach allows the author to employ a well-specified cost of capital to public utilities and to generalize the model to deal with three specific issues in rate regulation: (1) flotation cost; (2) double leverage; and (3) construction work in progress. The thesis provides general valuation principles for utility regulators involved in rate determination and describes how the regulators should behave if the implications of finance theory are accepted.

• Research Organization: Pennsylvania State Univ., University Park (USA)
• OSTI ID: 5014684
• Country of Publication: United States
• Language: English

Related Subjects

29 ENERGY PLANNING, POLICY, AND ECONOMY
290200* -- Energy Planning & Policy-- Economics & Sociology
CAPITAL
COST
EVALUATION
INCOME
MARKET
PUBLIC UTILITIES
RATE STRUCTURE
REGULATIONS