ELECTRIC UTILITY INCOME IN RESPONSE TO THE BREAKDOWN AT THE THREE-MILE-ISLAND NUCLEAR-POWER-PLANT AND SUBSEQUENT POLITICAL EVENTS

This paper examines the effect of the accident at the Three Mile Islan d nuclear power plant and subsequent political events on the income re ported by utilities which operated or had nuclear power plants under c onstruction at the time. The political cost hypothesis (Watts and Zimm erman 1978, p. 115) predicts that those utilities engaged in nuclear a ctivity would be expected to use the leeway allowed by generally accep ted accounting principles to report lower income in an effort to reduc e the likelihood of being targeted for adverse political action. The p aper examines the Allowance for Other Funds Used During Construction. This item is useful because it directly affects income and because man agers are allowed some discretion in determining this amount. The resu lts show that utilities which either operated nuclear power plants or had nuclear power plants under construction did not reduce their Allow ance for Other Funds when the accident occurred. This is contrary to t he political cost hypothesis. However, two related hypotheses, a debt covenant hypothesis (e.g., Dhaliwal 1980, p. 80; Zmijewski and Hagerma n 1981, pp. 131-132) and a regulatory cost hypothesis (based on Watts and Zimmerman 1978, p. 115), were supported. Evidence on a second regu latory cost hypothesis (also based on Watts and Zimmerman 1978, p. 115 ) is inconclusive.