Richard A. Michelfelder

Robust estimation with flexible parametric distributions: estimation of utility stock betas

The distributions of stock returns and capital asset pricing model (CAPM) regression residuals are typically characterized by skewness and kurtosis. We apply four flexible probability density functions (pdfs) to model possible skewness and kurtosis in estimating the parameters of the CAPM and compare the corresponding estimates with ordinary least squares (OLS) and other symmetric distribution estimates. Estimation using the flexible pdfs provides more efficient results than OLS when the errors are non-normal and similar results when the errors are normal. Large estimation differences correspond to clear departures from normality. Our results show that OLS is not the best estimator of betas using this type of data. Our results suggest that the use of OLS CAPM betas may lead to erroneous estimates of the cost of capital for public utility stocks.

Integrating Large-Scale Photovoltaic Power Plants into the Grid

The electric power industry in the U. S. will undergo radical change unlike any it has seen in its history as the renewable portfolio standards [RPS] of over 26 States are implemented during the next decade. The application queues of the largest RTOs in the U.S. are dominated by dispersed, intermittent renewable power generators such as wind and photovoltaics [PV]. Now that over half the States in the U.S. have adopted aggressive RPS, with some like Maine calling for as much as 40% renewables in the next decade, the issues of how a large penetration of dispersed renewables can be reliably integrated into the grid must come to the forefront of the technology discussion. The authors contend that the major challenge facing the U.S. electric power industry of the 21st century is fulfilling its societal obligations to be simultaneously reliable, economically priced and environmentally responsible as this most pervasive technological system grows into a new level of complexity under RPS requirements, deregulation and industry restructuring. This paper discusses as an example the origin and construction of a key grid scale PV power plant in Pennsylvania (the first on PJM) as well as how the free market forces have responded to federal tax incentives and regulatory-based incentives to integrate photovoltaics into the PJM grid. We describe how aggressive public policy has played an important role in that transition.

Electric utility regulation and investment in green energy resources

Electric utility investment in end-use efficiency and renewable energy resources is examined with current forms of Pigouvian taxes and subsidies that encourage investment in green energy resources. A model of a rate-of-return-regulated firm considers the impacts of policies on social optimality. It shows that cap-and-trade/floor-and-trade forms of Pigouvian taxes and subsidies cause electric utilities to (over) underinvest in conventional generation and (under) overinvest in green resources when the allowed rate of return (is above) equals the cost of capital. Therefore, these forms of taxes and subsidies combined with rate base rate-of-return regulation result in suboptimal investment in one type of asset or another regardless of the level of return exogenously set by regulators. Therefore, public utility investment is always suboptimal, one way or another. The form of regulation is empirically tested from stock price signals and observed by lack of investment in the electric power infrastructure and too much investment in green resources that will not meet renewable portfolio standards and the demand for electric services.