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

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  • Gert Brunekreeft
  • Margarethe Rammerstorfer

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.

Suggested Citation

  • Gert Brunekreeft & Margarethe Rammerstorfer, 2020. "OPEX-risk as a source of CAPEX-bias in monopoly regulation," Bremen Energy Working Papers 0032, Bremen Energy Research.
    • Handle: RePEc:bei:00bewp:0032
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    File URL: https://journals.sagepub.com/doi/10.1177/1783591720983184
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    References listed on IDEAS

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    1. M.E. Beesley & S.C. Littlechild, 1989. "The Regulation of Privatized Monopolies in the United Kingdom," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 454-472, Autumn.
    2. Paul L. Joskow, 1989. "Regulatory Failure, Regulatory Reform, and Structural Change in the Electrical Power Industry," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1989 Micr), pages 125-208.
    3. Nancy L. Rose, 2014. "Economic Regulation and Its Reform: What Have We Learned?," NBER Books, National Bureau of Economic Research, Inc, number rose05-1, March.
    4. Nongluk Buranabunyut & James Peoples, 2012. "An empirical analysis of incentive regulation and the allocation of inputs in the US telecommunications industry," Journal of Regulatory Economics, Springer, vol. 41(2), pages 181-200, April.
    5. Paul L. Joskow, 2014. "Incentive Regulation in Theory and Practice: Electricity Distribution and Transmission Networks," NBER Chapters, in: Economic Regulation and Its Reform: What Have We Learned?, pages 291-344, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Gert Brunekreeft & Julia Kusznir & Roland Meyer, 2020. "Output-orientierte Regulierung – ein Überblick," Bremen Energy Working Papers 0035, Bremen Energy Research.

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    More about this item

    Keywords

    CAPEX-bias; OPEX-risk; regulation; monopoly;
    All these keywords.

    JEL classification:

    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L9 - Industrial Organization - - Industry Studies: Transportation and Utilities

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