Examining the Impact of Rate-of-Return Regulation on Capital Project Planning

Abstract

As the United States’ population grows and power delivery needs continue to expand, utility companies are presented with a unique opportunity to improve reliability, increase capacity, and provide innovations to power and pipeline production and delivery infrastructure. While there is research dedicated to the impacts of the regulatory environment on project performance and the profitability of power and pipeline projects, there has been no research dedicated to identifying the differences in planning processes for such projects. Therefore, this paper contributes to the construction body of knowledge by explicitly documenting how the regulatory environment impacts the planning metrics involved in power and pipeline utility projects. This paper explores how capital project planning varies for power and pipeline projects in both regulated and nonregulated environments through an analysis of 770 projects in the Independent Project Analysis (IPA), project database. This paper presents a statistical comparison of pipeline and power project planning indicators—front-end loading (FEL) score, budget spent on front-end planning, and stakeholders engaged in front-end planning—to understand the impact of the regulatory environment on project planning. The results suggest that for some planning indicators studied, regulated projects outperform nonregulated projects, and for other indicators, the reverse is true. In particular, results show that regulated pipeline projects have better a project definition at the time of project authorization than nonregulated pipeline projects based on the FEL score; the reverse is true for power projects. Regulated pipeline and power projects spend more in a budget on front-end planning than nonregulated pipeline and power projects. Lastly, key stakeholders are represented in both regulatory environments with little difference between nonregulated and regulated environments in both pipeline projects, but power projects in regulated environments engage the key stakeholders for more time.