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The Investment Strategy of Generation Company Under Rate of Return Regulation

Author: PengJunDa
Tutor: YeZe
School: Changsha University of Science and Technology
Course: Business management
Keywords: A-J effect Generation Company rate of return regulation regulated asset asymmetric information Debt ratio
CLC: F224
Type: Master's thesis
Year: 2011
Downloads: 55
Quote: 1
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Abstract


In the traditional price regulation conditions, for the more absolute profits, monopoly enterprises will use more capital invest to alternative investment of other elements for the more absolute profits, leading to excessive capital investment, which means A-J effect. Although the power generation market is potentially competitive, and in 2002 the national power company split into five power generation groups, and implement " separate the factory and network、bidding" reform, but the original still has the monopoly of power ,so that market competition is in a non-fair condition. Reform of the electricity market in recent years reveals that generation sides is not entirely market-oriented generation, still in the regulatory agencies under the regulation.Since 2003, electric power companies began construction of a wave of investment, through increased capital investment to build factories, seats and seize territory and account for resources "staking" campaign. But power companies "staking" not only did not get more absolute profits, but makes its own commitments huge losses, the traditional interpretation of the AJ effect can not solve the problem. And power generation business investment projects have long payback period features, such as the construction of thermal power companies normally require 2 to 3 years in the investment rate of return regulation cycle, power generation business investment strategy is reasonable.This paper aims to study the power generation companies’investment strategy under the mercantile rate of return. Through the analysis of the game process between power generation companies and regulatory agencies, including the complete information dynamic game and incomplete information dynamic game, the author thinks that within the regulatory period, the power generation companies’investment strategy is not necessarily to be the excess investment. Regulatory agencies’approval attitude toward the valid assets as well as liabilities arising from rate increases and additional costs will form an inherent constraint, which constrain excess investment behavior of power generation companies, thus affecting the power generation business’s investment strategy.In considering three factors---the regulatory agency effective recognition of the extent of assets, bank lending rates and investment returns, power generation companies will adjust its own investment strategy according to different conditions to decide whether to be excess investment or invest according to average costs of the industry. At the same time, under the different investment strategy, there exists an optimal debt ratio in different power generation companies ensuring its profit. This is not only a supplement to the AJ effect and improvement, but also supplies a solution for the debt problems arising from the present high rate of power generation companies.

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