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The Impact of Regulation on Utilities’ Investments: A Survey and New Evidence from the Energy Industry

Laura Abrardi (), Cambini Carlo () and Laura Rondi
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Laura Abrardi: Politecnico di Torino
Cambini Carlo: Politecnico di Torino

De Economist, 2018, vol. 166, issue 1, 41-62

Abstract: Abstract Over the last 30 years, regulated sectors have undergone deep reforms in their institutional configuration, tools and goals. This paper reviews the impact of this evolution on energy firms’ investments. First, we survey the existing evidence on the effects of the presence of independent regulatory agencies on utilities’ investment rates in Europe in the MENA countries, and in Latin America, focussing on the role of de facto independence and the institutional framework. Second, we discuss the impact of incentive- versus rate-of-return regulation on firms’ incentives to invest and the interaction with firm private/public ownership. In this regard, we provide new econometric evidence of the recent developments of regulation, using a sample of European energy utilities tracked from 1997 to 2013. Our results confirm previous findings that investment is higher under incentive regulation than under rate of return regulation. However, differently from the earlier results, we find that investments seem to be driven more by the weighted average cost of capital than by the X-factor. The paper concludes reviewing recent evidence on service quality regulation on firm investment specifically on the impact of reward/penalty schemes on capital and operational expenditures.

Keywords: Regulatory institutions; Agency independence; Incentive regulation; Investment; Service quality (search for similar items in EconPapers)
JEL-codes: L51 L94 L95 D92 (search for similar items in EconPapers)
Date: 2018
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