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Agency Costs Of Third‐Party Financing And The Effects Of Regulatory Change On Utility Costs And Factor Choices

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  • Francis J. CRONIN
  • Stephen A. MOTLUK

Abstract

ABSTRACT**: Beginning in 1999, the Canadian Province of Ontario undertook restructuring and tried to implement performance based regulation for local electricity distribution utilities. Regulatory parameters were based on productivity research covering 1988–1997 that found little productivity difference by size, but wide variations in costs, factor mix, financing, and returns to capital among utilities. While some utilities questioned their ability to improve efficiency, other observers maintained many utilities were over‐capitalized, especially from third‐party financing paid by customers for connection/development charges; these observers noted that rates, profits, and valuations would be inflated. Despite its pervasive use, we can find no literature dealing with the implications of third‐party funding. We assess the effects and adjustment dynamics of regulatory and financing changes on costs, factor mix, and performance.

Suggested Citation

  • Francis J. CRONIN & Stephen A. MOTLUK, 2007. "Agency Costs Of Third‐Party Financing And The Effects Of Regulatory Change On Utility Costs And Factor Choices," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 78(4), pages 537-565, December.
    • Handle: RePEc:bla:annpce:v:78:y:2007:i:4:p:537-565
    DOI: 10.1111/j.1467-8292.2007.00346.x
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    References listed on IDEAS

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    3. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
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    5. Robert M. Spann, 1974. "Rate of Return Regulation and Efficiency in Production: An Empirical Test of the Averch-Johnson Thesis," Bell Journal of Economics, The RAND Corporation, vol. 5(1), pages 38-52, Spring.
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    7. Hjalmarsson, Lennart & Veiderpass, Ann, 1992. " Productivity in Swedish Electricity Retail Distribution," Scandinavian Journal of Economics, Wiley Blackwell, vol. 94(0), pages 193-205, Supplemen.
    8. David P. Baron & Robert A. Taggart Jr., 1977. "A Model of Regulation under Uncertainty and a Test of Regulatory Bias," Bell Journal of Economics, The RAND Corporation, vol. 8(1), pages 151-167, Spring.
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    Cited by:

    1. Cronin, Francis J. & Motluk, Stephen, 2011. "Ten years after restructuring: Degraded distribution reliability and regulatory failure in Ontario," Utilities Policy, Elsevier, vol. 19(4), pages 235-243.

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