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An Empirical Test of An Electric Utility Under An Allowable Rate of Return

This paper examines a utility's behaviour under the regulatory constraint of a maximum allowable rate of return. The golden rule of production efficiency, i.e. that the marginal productivities of the input factors are equal, is used as our criterion to examine the utility's economic behaviour. Our case study uses a translogproduction function to investigate the production efficiency of the Taiwan Power Company. Two null hypotheses are tested with the results obtained supporting the existence of the A-f effect. The implications of the results are discussed, a comparison with previous studies is presented, and suggestions for further research are made.

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Energy Specializations: Electricity – Markets and Prices ; Electricity – Policy and Regulation

JEL Codes:
D42 - Market Structure, Pricing, and Design: Monopoly
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Electric utilities, Taiwan Power, Rate of return, Regulation, Economic efficiency

DOI: 10.5547/ISSN0195-6574-EJ-Vol11-No3-4

Published in Volume 11, Number 3 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.