Regulatory and tax alternatives and the financing of electricity supply

The efficacy of various regulatory and tax alternatives for improving the financial conditions of electric utilities is evaluated. The authors submit that the electric utility industry will be faced with serious shortages of capital over the next twenty years unless changes are made in current regulatory and/or tax policies that will help ease these shortages. A mathematical supply-demand-regulatory model is used to aid in the evaluation of the policy alternatives discussed. It is concluded that allowing a higher rate of return on equity (as high as 16%), or including at least a portion of construction work in progress in the rate base would significantly reduce the capital shortage. Often suggested tax alternatives such as increasing the investment tax credit rate or expensing preferred stock dividends are found to lack the intended impact. (11 references) (auth)