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The Valuation of Nuclear Power in The Post-Three Mile Island Era

Martin B. Zimmerman

Year: 1983
Volume: Volume 4
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol4-No2-3
View Abstract

Abstract:
On March 28, 1979, an event at the Three Mile Island (TMI) nuclear plant of the General Public Utilities Corporation placed the future of nuclear power in the United States in doubt. The "transient" that led to the partial melting of the cladding around the fuel rods was to create concern in the nuclear industry and in the public at large about the safety, costs, and acceptability of nuclear power. While the impressionistic evidence is that TMI has caused great problems for the industry, there is little systematic evidence that this is the case. What real damage did the accident do to the prospects for nuclear power in the United States?The potential damages to the nuclear industry were of several varieties. First the accident might have caused people to reevaluate the safety of nuclear reactors.



Fair Value Versus Original Cost Rate Base Valuation During Inflation

Walter J. Primeaux, Jr., Edward L. Bubnys, and Robert H. Rasche

Year: 1984
Volume: Volume 5
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol5-No2-6
View Abstract

Abstract:
Valuation of public utility property for rate-making purposes has been controversial since the beginning of public regulation. Despite much academic research and practical experience, there is no consensus of academicians or practitioners concerning the appropriate value of physical property used for providing service to customers. In public utility rate making, the value of this physical property, net of depreciation, is called the rate base. An important question is how well regulatory processes adjust the rate base for price level changes during periods of inflation.Statutes of the individual states determine how public utility property will be valued for rate-making purposes. Three basic methods are employed. Original cost jurisdictions set the rate base at the value of the property when it was first installed in a public utility application; the fair value method attempts to adjust the base to a level that more correctly reflects its current value; and the reproduction cost approach tries to establish a value that would permit reproduction of the property. Because the reproduction cost approach is not now being used by any state, this study focuses on the original cost and fair value methods.



Regulatory View of Capacity Valuation in California

Eric Woychik

Year: 1988
Volume: Volume 9
Number: Special Issue 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol9-NoSI2-4
No Abstract



Estimating Household Value of Electrical Service Reliability with Market Research Data

Andrew A. Goett, Daniel L. McFadden and Chi-Keung Woo

Year: 1988
Volume: Volume 9
Number: Special Issue 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol9-NoSI2-7
No Abstract



The Value of Commodity Purchase Contracts With Limited Price Risk

Elizabeth Olmsted Teisberg and Thomas J. Teisberg

Year: 1991
Volume: Volume 12
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol12-No3-8
View Abstract

Abstract:
This paper describes and demonstrates the equilibrium market valuation of commodity purchase contracts with price ceilings or price floors or both. These contracts, which we call "limited price risk" contracts, are significantly easier for buyers and sellers to agree upon than fixed price contracts when price uncertainty is high and buyers and sellers have inconsistent price expectations. Analysis of an actual natural gas contract as well as the existence of many brokers promoting limited price risk gas contracts, suggest that these contracts may be priced inefficiently in practice. Our example application should help managers to make use of modem financial techniques in assessing the value of these types of contracts.



The Hotelling Principle: Autobahn or Cul de Sac?

G. C. Watkins

Year: 1992
Volume: Volume 13
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol13-No1-1
View Abstract

Abstract:
The economics of relations between prices and resource stocks has been dominated by the Hotelling Principle. But seemingly little attention has been given to the Principle by the oil and gas industry itself. In this paper the Principle is appraised, some new empirical results based on the value of oil and gas reserves sales are introduced, models which relax more of the Hotelling assumptions are reviewed, and the industry milieu in the context of a Hotelling Style framework is discussed. The Principle is seen as affording fundamental theoretical insights, but is not found to cope well with industry realities.



Project Evaluation: A Pracitcal Asset Pricing Method

Henry D. Jacoby and David G. Laughton

Year: 1992
Volume: Volume 13
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol13-No2-2
View Abstract

Abstract:
This paper presents a practical approach to project evaluation using techniques of modern financial economics, with a sample application to oil development under a complex tax system. The method overcomes shortcomings of conventional discounted cash flow (DCF) methods which are either imprecise about the relation between economic value and uncertainty, or are rigid and unrealistic in the required assumptions about how a project's risks (and therefore its value) are influenced by market conditions, the project physical structure, and tax and contract provisions. It is based on the formulation and estimation of an "information model" which represents the resolution over time of uncertainties underlying a project (oil prices in the examples shown). The project can then be valued using derivative asset valuation, which replicates the consequences of a complex asset by a traded portfolio of simpler assets (in our case, riskless bonds and future claims on oil).



Petroleum Property Valuation: A Binomial Lattice Implementation of Option Pricing Theory

Eric Pickles and James L. Smith

Year: 1993
Volume: Volume 14
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol14-No2-1
View Abstract

Abstract:
We take a simple tutorial approach to explain how option valuation can be applied in practice to the petroleum industry. We discuss a simple spreadsheet formulation, demonstrate how required input data can be extracted from market information, and give several exploration and development examples. Under the market and fiscal conditions described we derive the value of discovered, undeveloped reserves projected to result from offshore licensing in the United Kingdom, and we show how to determine the maximum amount that should be committed to an exploration work program to find those reserves. Lease-bidding and farm-out applications are briefly described. We recommend option valuation as an alternative to discounted cash flow analysis in situations where cash flows are uncertain and management has operating flexibility to adjust investment during the life of the project, and point to further work needed to fully value nested or embedded options.



System Average Rates and Management Efficiency: A Statistical Benchmark Study of U.S. Investor-Owned Electric Utilities

Ernst R. Berndt, Roy Epstein and Michael J. Doane

Year: 1996
Volume: Volume17
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol17-No3-1
View Abstract

Abstract:
Proposals to restructure electric utilities have heightened interest in understanding what factors contribute to the variation in system average rates (SARs) across utilities. Direct comparisons of utilities' average rates have been used to assess management performance and the possibility of using mandatory restructuring to reduce rates. However, direct rate comparisons can lead to highly unreliable conclusions because they ignore the wide variety of regional, economic, and regulatory factors that affect rates across utilities. This paper presents a statistical benchmark study of SARs using 1984-93 data on 99 U.S. investor-owned utilities. The model is applied to evaluate the electric rates of three California investor-owned utilities. We find electric rates are affected to a large extent by factors outside the direct and immediate control of management. Controlling for these effects, there is no evidence that these California utilities, which have relatively high system average rates, suffer from poor management performance.



Implications of Output Price Risk and Operating Leverage for the Evaluation of Petroleum Development Projects

Gordon Salahor

Year: 1998
Volume: Volume19
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol19-No1-2
View Abstract

Abstract:
This paper is the first in a series that describes how Modem Asset Pricing (MAP) may be used for project evaluation in the upstream petroleum industry. It shows how MAP methods can be used to value a project, if it i's possible to split its cash-flows into two components: one for revenue and one for cost. Two design choices for a "now or never " natural gas field development are used as examples of what can be gained by this type of approach to project evaluation. The first choice involves a tradeoff between capital and operating costs, while the second involves a tradeoff between costs and potential production rate. The results show that the use of standard DCF methods can induce systematic, and possibly misleading, biases into the analyses that lie behind project design and selection.




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