Stephen Jarvis is an Assistant Professor in Environmental Economics in the Department of Geography & Environment, LSE.

He will be presenting his paper “Rate of Return Regulation Revisited”

Abstract:

Utility companies recover their capital costs through regulator-approved rates of return on debt and equity. The US costs of risky and risk-free capital have fallen dramatically in the past 40 years, but these utility rates of return have not. We estimate the gap between what utilities are paid now, and what they would have been paid if their rate of return had followed capital markets, using a comprehensive database of utility rate cases dating back to the 1980s. We estimate that the current average return on equity is 0.5–4 percentage points higher than historical relationships would suggest, and consumers pay an average of $2–8 billion per year more than they would otherwise. We then revisit the effect posited by Averch–Johnson (1962), estimating the consequences of this incentive to own more capital: a 1 percentage point increase in the return on equity increases new capital investment by about 5% in our preferred estimate.

Please email gri.events@lse.ac.uk  to request the Zoom joining details for this workshop by by 5pm on Tuesday, 22th February 2022.

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