A Critical Comparison of Utility-Type Ratemaking Methodologies in Oil Pipeline Regulation
Volume: Volume 12, No. 2
Issue: Autumn 1981
Pages: pp. 392-412
Authors: Peter Navarro, Bruce C. Petersen, and Thomas R. Stauffer
Title: A Critical Comparison of Utility-Type Ratemaking Methodologies in Oil Pipeline Regulation
Abstract: This article tests the efficacy of four formulas for specifying regulated utility rates. All exhibit "intertemporal bias" in that rates are disproportionately and seriously shifted forward upon current consumers ("front-end loading"), although the ICC and Consent Decree formulas yield rates less skewed than the utility and escalated utility rate formulas. "Formula bias" arises in all cases, because the ex post rates of return can differ markedly in practice from the rates allowed by the regulators, even if all parameters and forecasts are exact. This is a consequence of intrinsic structural failings in the formulas themselves. A fifth formula, levelized real rates, can eliminate both biases, but increases regulatory risk to the firm. The biases are exacerbated by high inflation rates and complicated by accounting or tax options. The formulas differ so dramatically that important issues of allocative efficiency and intertemporal equity are at stake, as well as the viability of investment incentives in key energy industries.
JEL Classification
Industry Studies Extractive Industries Oil, Gas, and Other Fuels (6323)