Risk, Price Regulation, and Irreversible Investment

Lewis Evans and Graeme Guthrie

No 18977, Working Paper Series from Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation

Abstract: We show that regulators' price-setting rate base and allowed rate of return decisions are inextricably linked. Once regulators switch from traditional rate of return regulation the irreversibility of much infrastructure investment significantly alters the results of the usual approach to price-setting as exemplified by Marshall Yawitz and Greenberg (1981). In particular the practice of 'optimizing' inefficient assets out of the regulated firm's rate base as in total element long-run incremental cost (TELRIC) calculations in telecommunications exposes the firm to demand risk. The firm requires an economically-significant premium for bearing this risk and this premium is an increasing function of the unsystematic risk of demand shocks. In addition we argue that if the firm is to break even under incentive regulation then the level of the rate base will not generally equal the optimized replacement cost.

Date: 2005
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://ir.wgtn.ac.nz/handle/123456789/18977

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:vuw:vuwcsr:18977

Access Statistics for this paper

More papers in Working Paper Series from Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation ISCR, PO Box 600, Victoria University Wellington 6140, New Zealand. Contact information at EDIRC.
Bibliographic data for series maintained by Library Technology Services ().