Skip to main content
eScholarship
Open Access Publications from the University of California

Investment under Regulatory Uncertainty: U.S. Electricity Generation Investment Since 1996

Abstract

We investigate how uncertainty surrounding possible comprehensive regulatory restructuring affect the investment behavior of firms operating in the industry. We argue that such regulatory uncertainty can create a substantial option value that leads to firms delaying their investment decision in order to gather more information and assurances regarding future regulatory changes. We empirically examine this claim using data on U.S. electricity generation investment from 1996 to 2000. Using state-level, aggregate investment data, we find evidence that is consistent with the presence of substantial option value: a strong link between lesser aggregate generation investment and greater restructuring enactment uncertainty. Using data on firm-level generation investment decisions for a sample of major U.S. independent power producers (IPPs) from 1996 to 2000, we estimate a more structural model of generation investment that incorporates the option value effect. Comparing estimates from this “real options” based model with the corresponding estimates from two alternative models, expected Net Present Value (NPV) and Forward-Looking (FWL), we show that accounting for the option value can lead to different inferences regarding the impact of regulatory restructuring on IPP generation investment.

Main Content
For improved accessibility of PDF content, download the file to your device.
Current View