The Effects of Regulatory Policies on the Cost of Debt for Electric Utilities: An Empirical Investigation

Abstract

This article develops a model of debt-cost determination for regulated electric utilities, based on an application of finance theory. Estimation of the model allows the hypothesis that regulatory policy directly influences the cost of debt to be tested and also enables the specific effects attributable to individual regulatory policy variables to be examined. Regulatory decisions are found to have statistically and economically significant effects on the cost of debt for electric utilities, and the most important effects are associated with the treatment of construction work in progress for ratemaking purposes, the extent of regulatory delay, and whether or not interim rate relief is provided. Copyright 1989 by the University of Chicago.

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