Comparing Models of Electric Utility Behavior

Several models of electric utility behavior have been suggested and tested. Among them are profit and revenue maximization and cost and revenue minimization. The latter being the stated objective of many public utilities. These four models are compared empirically by examining power plant choice from 1970 to 1977. The net present value (profit) model yields the highest estimated likelihood and its parameters are consistent with a priori theory. Firms were attempting to maximize their return, while minimizing fixed and variable costs. Also, I find no evidence that the difference between the allowed rate of return and the cost of capital influenced technology choice.