FINREG : a financialregulatory model for utility capacity expansion plan evaluation

Abstract

A corporate financial/regulatory model, called FINREG, is presented to simulate a utility's accounting practices, financial policy and constraints, and ratemaking environment. For each year of simulation FINREG will yield as output electricity rates, pro-forma accounting statements, selected accounting ratios, and the accumulated present value of dividends less common stock offerings. The model is used to perform a financial evaluation of two feasible expansion options for Boston Edison Company.

The two options are generated by OPTGEN, an MIT Energy Laboratory dynamic programming capacity expansion program. OPTGEN provides the capacity additions and annual fuel costs for each option. For the first plan, OPTGEN added an 800 MW coal unit in 1987 and a 250 MW coal unit in 1992 to the existing Boston Edison system. For the second, a 1000 MW nuclear unit was prespecified to begin operation in 1989, and OPTGEN added a 250 MW coal unit in 1987.

Financial and regulatory assumptions were specified for each option. FINREG generated selected statistics for the two options through 1998. The equity value associated with each option is estimated. Under the given assumptions, Boson Edison's shareholders are better off with the two coal unit expansion plan.