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Accounting for and finance of generation investment

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  • Newbery, D.

Abstract

State-owned electricity companies typically set prices that are too low to finance new investment when needed, and which create additional problems where private investment is sought. The paper asks to what extent this can be attributed to historic cost accounting, and finds that provided the required rate of return is appropriately set, this seems unlikely to be the main cause of under-pricing, although inflation in a period of excess capacity can amplify such under-pricing. It seems more likely that the main problem is a failure to charge an appropriate riskadjusted rate of return. The paper concludes by suggesting how such companies can move to a more efficient price structure, provided the correct cost of capital is recognised in the regulated pricing structure.

Suggested Citation

  • Newbery, D., 2008. "Accounting for and finance of generation investment," Cambridge Working Papers in Economics 0830, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:0830
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    References listed on IDEAS

    as
    1. Richard J. Gilbert & David M. Newbery, 1994. "The Dynamic Efficiency of Regulatory Constitutions," RAND Journal of Economics, The RAND Corporation, pages 538-554.
    2. Newbery, D., 2006. "Power sector reform, private investment and regional co-operation," Cambridge Working Papers in Economics 0647, Faculty of Economics, University of Cambridge.
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    More about this item

    Keywords

    Electricity investment; pricing; accounting; cost of capital;

    JEL classification:

    • L32 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Public Enterprises; Public-Private Enterprises
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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