Regulatory Uncertainty, Corporate Expectations, and the Postponement of Investment: The Case of Electricity Market Deregulation

Abstract:     
We examine whether regulatory uncertainty encourages firms to delay capital investment decisions. The case of electricity market deregulation in the U.S is unique because the period of regulatory uncertainty is long-lived and there are data available on planned future investments. These previously unused expectational data provide unique insight into the broader effects of regulatory uncertainty.

Relying on a real options modeling perspective, we hypothesize that industry participants reduced their investments in electric power-generating assets dramatically in the 1990s in response to increased regulatory uncertainty and then, just as dramatically, increased investment beginning in 2000 due to the resolution of some regulatory uncertainty. We provide empirical evidence that regulatory uncertainty is significantly and strongly negatively related to planned utility investments. This negative effect is 44% stronger for so-called green technologies.

Number of Pages in PDF File: 34

Keywords: investment, regulatory uncertainty, real options

JEL Classification: G38, G11, l51, Q48

working papers series