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The Efficient Allocation of Proceeds from a Utility's Sale of Assets

  • Paul W. MacAvoy

    ()

    (School of Management)

  • J. Gregory Sidak

    ()

    (General)

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    This Article evaluates the regulatory treatment of windfall proceeds from a utility's purchase and subsequent sale of important assets. For service to be sustained, regulatory treatment of proceeds from all jurisdictional activities is such that expected returns to equity investment will equal the equity costs of capital. But over time, a utility's actual net revenues vary from expected net revenues, and that variation may be positive or negative. Economic efficiency requires that the regulator allocate these variations to the investor: Given symmetric treatment of unexpected profit and loss outcomes, the risks that the investor bears under the regulatory contract are properly compensated. The shareholder should receive any gain, as a result of a change in market conditions, including changes in technology that increase the demand for the utility's service or render its capital stock more productive. The exception is that the ratepayer should receive any gain that the utility experiences as a result of a change in regulatory conditions. On the utility's sale of an asset that has been used to provide regulated services, and that has appreciated in value, the utility's shareholders should receive the proceeds from the asset's sale. This rule, which follows from efficiency theory, is evident in the reported decisions by courts and regulatory commissions in the United States. In short, the jurisprudence on the allocation of windfall proceeds from a utility's sale of assets advances economic efficiency.

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    Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm218.

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    Date of creation: 17 Aug 2001
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    Handle: RePEc:ysm:somwrk:ysm218
    Contact details of provider: Web page: http://icf.som.yale.edu/
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