The Efficient Allocation of Proceeds from a Utility's Sale of Assets

41 Pages Posted: 1 Dec 2001

See all articles by Paul W. MacAvoy

Paul W. MacAvoy

Yale School of Management (Deceased); Yale University, Yale Graduates Energy Study Group (Deceased)

J. Gregory Sidak

Criterion Economics, L.L.C.

Abstract

This Article evaluates the regulatory treatment of windfall proceeds from a utility's purchase and subsequent sale of important assets. For service to be sustained, regulatory treatment of proceeds from all jurisdictional activities is such that expected returns to equity investment will equal the equity costs of capital. But over time, a utility's actual net revenues vary from expected net revenues, and that variation may be positive or negative. Economic efficiency requires that the regulator allocate these variations to the investor: Given symmetric treatment of unexpected profit and loss outcomes, the risks that the investor bears under the regulatory contract are properly compensated. The shareholder should receive any gain, as a result of a change in market conditions, including changes in technology that increase the demand for the utility's service or render its capital stock more productive. The exception is that the ratepayer should receive any gain that the utility experiences as a result of a change in regulatory conditions. On the utility's sale of an asset that has been used to provide regulated services, and that has appreciated in value, the utility's shareholders should receive the proceeds from the asset's sale. This rule, which follows from efficiency theory, is evident in the reported decisions by courts and regulatory commissions in the United States. In short, the jurisprudence on the allocation of windfall proceeds from a utility's sale of assets advances economic efficiency.

Keywords: Windfall Gains, Stranded Costs, Regulatory Impact

JEL Classification: K2, K23, L9, L94, L97, L98

Suggested Citation

MacAvoy, Paul W. and Sidak, J. Gregory, The Efficient Allocation of Proceeds from a Utility's Sale of Assets. Energy Law Journal, Vol. 22, No. 2, pp. 233-273, 2001. Available at SSRN: https://ssrn.com/abstract=292723 or http://dx.doi.org/10.2139/ssrn.292723

Paul W. MacAvoy (Contact Author)

Yale School of Management (Deceased)

Yale University, Yale Graduates Energy Study Group (Deceased)

J. Gregory Sidak

Criterion Economics, L.L.C. ( email )

1717 K Street, N.W.
Washington, DC 20006
United States
(202) 518-5121 (Phone)

HOME PAGE: http://www.criterioneconomics.com

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