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Allowed Revenue of Network System Operators in the Croatian Energy Sector and Interest Rate Changes on the Croatian Capital Market

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  • Tomislav Gelo Željko Vrban Dalibor Pudić

    (Faculty of Economics and Business, University of Zagreb, Zagreb, Croatia. Croatian Energy Regulatory Agency, Zagreb, Croatia. Croatian Energy Regulatory Agency, Zagreb, Croatia.)

Abstract

The energy sector is characterized by market and monopoly activities. Monopoly activities include network activities, transmission and distribution of electricity, and transport and distribution of natural gas. For this reason, the revenue of the network activities is defined as allowed income, and it is under the control of the national energy regulator. In Croatia, this is the Croatian Energy Regulatory Agency. The allowed revenues of the network system operator in the Croatian energy sector are defined by the methodologies for individual network activities, which are based on the method of eligible costs. Network activities are usually capital-intensive activities. Capital cost is an element of the eligible cost method and is accounted for as a weighted average cost of capital (WACC). WACC affects the allowed revenue of the network system operator and the network tariff. It depends on the interest rates on debt capital, the risk-free rate, the market risk premium and the corporate tax rate. Changing the interest rate on the capital market, which also depends on the credit risk of the country, affects both the change in WACC and the change of tariffs for transport / transmission of energy. Amortization and operating expenses of the network operator, approved by the energy regulator, also have a significant impact on allowed revenues. The impact of the WACC change on the allowed revenue and network tariffs of network system operators has a different impact on the network tariffs, which depends on the structure of the eligible costs of a particular network system operator. Changing WACC affects the changes in tariffs of the network system operator. The aim of the paper is to determine how an interest rate change affects the WACC and how the change in WACC affects the change in the allowed revenue and the network tariff of the gas transport operator and the transmission of electricity in Croatia. The paper will analyse the tariffs of electricity transmission and natural gas transport in Croatia and compare them with those in the European Union. JEL Classification: D42, G32, L51

Suggested Citation

  • Tomislav Gelo Željko Vrban Dalibor Pudić, 2019. "Allowed Revenue of Network System Operators in the Croatian Energy Sector and Interest Rate Changes on the Croatian Capital Market," Zagreb International Review of Economics and Business, Faculty of Economics and Business, University of Zagreb, vol. 22(SCI2), pages 73-91, December.
    • Handle: RePEc:zag:zirebs:v:22:y:2019:i:sci2:p:73-91
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    References listed on IDEAS

    as
    1. Joskow, Paul L., 2007. "Regulation of Natural Monopoly," Handbook of Law and Economics, in: A. Mitchell Polinsky & Steven Shavell (ed.), Handbook of Law and Economics, edition 1, volume 2, chapter 16, pages 1227-1348, Elsevier.
    2. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-131, February.
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    More about this item

    Keywords

    WACC; interest rate; network system operator; allowed revenue; network tariff;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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