An empirical test of feedbacks in public utility regulation

Abstract

Current methods for estimation of the cost of capital in public utility rate making results in a feedback mechanism where pressures from capital markets attenuate potential deviations from a cost of capital rate of return. An empirical model of the electric utility industry reveals an inverse relationship between security prices and the allowed rate of return, thus supporting the feedback hyopothesis. Further, the attenuation effect is augmented by net present value effects of growth in demand.