The Regulatory Treatment of Utility Diversification

Johannes M. Bauer

Land Economics, 1995, vol. 71, issue 3, 386-400

Abstract: Recent regulatory reform has gradually relaxed the constraints on vertical and horizontal diversification of public utilities. After earlier strategies of conglomerate diversification utilities more recently started to expand into domestic and international activities more closely related to their core business. Sound diversification may improve corporate performance, but raises complicated policy issues in firms operating in both regulated and unregulated markets. The paper studies the problems of cross-subsidization, risk-shifting and profit-shifting that may result under conditions of partial regulation. Policy approaches that enable firms to pursue efficient diversification while reducing inefficient diversification incentives created by partial regulation are being analyzed.

Date: 1995
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