OPEX-risk as a source of CAPEX-bias in monopoly regulation

Gert Brunekreeft and Margarethe Rammerstorfer

No 32, Bremen Energy Working Papers from Bremen Energy Research

Abstract: This paper shows with a formal model that under monopoly regulation, OPEX-risk can be a source for a CAPEX-bias. If OPEX and CAPEX are substitutes, the regulated firm can reduce the risk of the firm and thereby reduce the true cost of capital by rebalancing OPEX and CAPEX. If the regulated rate-of-return on capital is not influenced by the firm’s actions, this creates a margin between the regulated rate-of-return and the true cost of capital; this causes a CAPEX-bias. We examine the so-called fixed-OPEX-CAPEX-share (FOCS), which is a variation of TOTEX-regulation, as a promising remedy to address the CAPEX-bias. We argue that FOCS is effective to address the CAPEX-bias, while it can easily be implemented.

Keywords: CAPEX-bias; OPEX-risk; regulation; monopoly (search for similar items in EconPapers)
JEL-codes: K23 L12 L51 L9 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2020-12
New Economics Papers: this item is included in nep-ind, nep-law, nep-ore and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Competition and Regulation in Network Industries, December 2020

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Persistent link: https://EconPapers.repec.org/RePEc:bei:00bewp:0032

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