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Under-pricing electricity and the puzzle of regulatory accounting

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  • David Newbery

    (University of Cambridge)

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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • David Newbery, 2008. "Under-pricing electricity and the puzzle of regulatory accounting," Working Papers EPRG 0815, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    • Handle: RePEc:enp:wpaper:eprg0815
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    References listed on IDEAS

    as
    1. Gilbert,Richard J. & Kahn,Edward P. (ed.), 1996. "International Comparisons of Electricity Regulation," Cambridge Books, Cambridge University Press, number 9780521495905, September.
    2. Richard J. Gilbert & David M. Newbery, 1994. "The Dynamic Efficiency of Regulatory Constitutions," RAND Journal of Economics, The RAND Corporation, vol. 25(4), pages 538-554, Winter.
    3. Newbery, D., 2006. "Power sector reform, private investment and regional co-operation," Cambridge Working Papers in Economics 0647, Faculty of Economics, University of Cambridge.
    4. Frank L. Clarke, 1998. "Deprival Value and Optimized Deprival Value in Australasian Public Sector Accounting: Unwarranted Drift and Contestable Serviceability," Abacus, Accounting Foundation, University of Sydney, vol. 34(1), pages 8-17, March.
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    Keywords

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    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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