The economic consequences of regulatory accounting in the nuclear power industry: market reaction to plant abandonments

Between 1972 and 1990, US electric utility companies cancelled orders for 117 nuclear power plants (NEI, 1996, pp. 1±6). The regulatory accounting methods adopted by utility rate setting commissions determined whether utilities could recover the losses on cancelled plants through higher rates. In e€ect, the choice of accounting methods determined how billions of dollars invested in cancelled nuclear plants was allocated between utility stockholders, ratepayers, and taxpayers (DOE/EIA, 1983, pp. ix±x). Our paper examines the economic consequences to stockholders of capital project abandonments in a regulated industry. The results show that while regulatory treatment of abandonment costs was generally favorable to investors, the market reacted negatively to nuclear project abandonment announcements indicating that investors did not expect to fully recoup abandonment losses. Two stage regression is used to investigate the determinants of the marketÕs reaction to project cancellations. Ó 2000 Elsevier Science Ltd. All rights reserved.