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Regulatory Hindsight Review and Innovation by Electric Utilities

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  • Lyon, T.P.

Abstract

Regulation is often thought to discourage innovation. This problem is not evidenced by electric utility behavior up through the mid-1970s, during which time utilities adopted various new generation technologies. However, retrospective "prudence" reviews, common since the 1980s, may discourage utilities from investing in promising but risky new technologies. When innovative technologies have lower expected costs but greater cost variance than conventional technologies, the threat of hindsight review may cause a utility to switch from an innovative technology to a more costly conventional one, and may cause underinvestment. Profit-sharing schemes, properly designed, can promote efficient levels of investment in innovative technologies. Copyright 1995 by Kluwer Academic Publishers

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Bibliographic Info

Paper provided by Indiana - Center for Econometric Model Research in its series Papers with number 93-013.

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Length: 25 pages
Date of creation: 1993
Date of revision:
Handle: RePEc:fth:indian:93-013

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Postal: Indiana University, Center for Econometric Model Research, Department of Economics; Bloomington, IN 47405.
Phone: 812-855-1021
Fax: 812-855-3736
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Web page: http://www.indiana.edu/~econweb/
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Keywords: electricity ; technology;

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Cited by:
  1. Larry Blank & John Mayo, 2009. "Endogenous Regulatory Constraints and the Emergence of Hybrid Regulation," Review of Industrial Organization, Springer, vol. 35(3), pages 233-255, November.
  2. Paul Levine & Neil Rickman, 2003. "Price Regulation, Investment and the Commitment Problem," School of Economics Discussion Papers 0603, School of Economics, University of Surrey.
  3. Lyon, Thomas P. & Huang, Haizhou, 1997. "Innovation and imitation in an asymmetrically-regulated industry," International Journal of Industrial Organization, Elsevier, vol. 15(1), pages 29-50, February.
  4. Graeme Guthrie, 2006. "Regulating Infrastructure: The Impact on Risk and Investment," Journal of Economic Literature, American Economic Association, vol. 44(4), pages 925-972, December.

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