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Justifying Capital Investments in the Emerging Electric Utility: Accounting for an Uncertain and Changing Industry Structure

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The Virtual Utility

Part of the book series: Topics in Regulatory Economics and Policy Series ((TREP,volume 26))

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Abstract

The electric utility industry faces fundamental and strategic changes in the way electric power is generated, distributed, and sold. Capital budgeting and capital allocation processes in traditional utilities have to be re-organized and changed to move away from an emphasis on asset additions driven by regulatory requirements to reflect opportunities and costs in the uncertain and unstable strategic structure of the new electric utility industry. This paper examines the limitations of traditional capital budgeting practices in justifying capital investments in the emerging electric utility where many of the benefits are strategic, intangible, generally difficult or impossible to assess in terms of cash flows. While there does not seem to be any one best universal procedure, this study develops and recommends the use of an augmented adjusted net present value (ANPV) procedure for capital budgeting in the emerging electric utility.

The author is grateful to John Carroll University and the Mellen Foundation for research support, and to S. Awerbuch, R. Bower, P. Busby, A. Craft, R. Ginn, D. Hagestrom, T. Hoff, C. Moyer, and F. Navratil for useful comments, but remains solely responsible for the contents.

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  1. John Carroll University, USA

    Raj Aggarwal

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  1. Energy Finance and Economics, USA

    Shimon Awerbuch

  2. University of New Mexico, USA

    Alistair Preston

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Aggarwal, R. (1997). Justifying Capital Investments in the Emerging Electric Utility: Accounting for an Uncertain and Changing Industry Structure. In: Awerbuch, S., Preston, A. (eds) The Virtual Utility. Topics in Regulatory Economics and Policy Series, vol 26. Springer, Boston, MA. https://doi.org/10.1007/978-1-4615-6167-5_6

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