Incentive vs. Conventional Regulation of New Utility Construction

Major plant construction projects represent a large part of a typical utility's rate base and construction cost overruns are a perennial problem associated with these projects. The conventional approach to prevent overruns is direct regulatory oversight by a regulatory commission . Yet this approach fails to provide on-going incentives for the most cost effective decisions by the utility. This article contrasts an incentive method of regulation which inversely relates the rate of return granted by the regulatory agency with the level of overruns incurred, with conventional rate regulation. A discounted cash flow simulation model is employed based on data from an· electric generation project currently under construction in Central New York