Incentive vs. Conventional Regulation of New Utility Construction
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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.