Political Environments, Rate Regulation, and Investment in Electricity Grid

• Departmental Seminar

Date and Location

Friday, May 31, 2013, 12:10 PM - 1:30 PM
ARE Conference Room, 2102 Social Sciences and Humanities

Abstract

We study how political environments affect regulation of electric utilities, focusing on the rate of return approved for and investments made by utilities in the U.S. First, political ideology of the state and party affiliation of regulators have a significant influence on the rate of return utilities earn on their equity. Second, a high rate of return leads to a high level of investment in electric distribution system, which sometimes leads to better reliability, though it also increases electricity price. We assess long-run welfare effects of political environments through rate of return, investment, and reliability. Finally, we conduct counterfactual experiments of various rules that restrict regulators’ discretion in rate regulation.