IDEAS home Printed from https://ideas.repec.org/a/eee/eneeco/v57y2016icp192-203.html
   My bibliography  Save this article

Regulation and investment incentives in electricity distribution: An empirical assessment

Author

Listed:
  • Cullmann, Astrid
  • Nieswand, Maria

Abstract

We analyze the effects of incentive regulation with revenue caps on the investment behaviors of 109 German electricity distribution companies. We hypothesize that with Germany's implementation of incentive regulation in 2009 firms increase their investments in the base year when the rate base is determined for the following regulatory period. We build a model that controls for both firm-specific heterogeneity and ownership. The results show that investments increase after 2009, especially in the base year. We find that publicly owned firms do not exhibit a different investment behavior than private firms. We conclude that a comprehensive assessment of investment decisions should include all institutional aspects of incentive regulation.

Suggested Citation

  • Cullmann, Astrid & Nieswand, Maria, 2016. "Regulation and investment incentives in electricity distribution: An empirical assessment," Energy Economics, Elsevier, vol. 57(C), pages 192-203.
  • Handle: RePEc:eee:eneeco:v:57:y:2016:i:c:p:192-203
    DOI: 10.1016/j.eneco.2016.05.007
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0140988316301256
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Christopher F Baum & Mark E. Schaffer & Steven Stillman, 2003. "Instrumental variables and GMM: Estimation and testing," Stata Journal, StataCorp LP, vol. 3(1), pages 1-31, March.
    2. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
    3. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    4. Arellano, Manuel, 2016. "Modelling optimal instrumental variables for dynamic panel data models," Research in Economics, Elsevier, vol. 70(2), pages 238-261.
    5. Balazs Egert, 2009. "Infrastructure investment in network industries: The role of incentive regulation and regulatory independence," William Davidson Institute Working Papers Series wp956, William Davidson Institute at the University of Michigan.
    6. Dag Morten Dalen, 1998. "Yardstick Competition and Investment Incentives," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(1), pages 105-126, March.
    7. Greenstein, Shane & McMaster, Susan & Spiller, Pablo T, 1995. "The Effect of Incentive Regulation on Infrastructure Modernization: Local Exchange Companies' Deployment of Digital Technology," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(2), pages 187-236, Summer.
    8. Mehdi Farsi & Massimo Filippini, 2004. "Regulation and Measuring Cost-Efficiency with Panel Data Models: Application to Electricity Distribution Utilities," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 25(1), pages 1-19, August.
    9. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    10. Poudineh, Rahmatallah & Jamasb, Tooraj, 2016. "Determinants of investment under incentive regulation: The case of the Norwegian electricity distribution networks," Energy Economics, Elsevier, vol. 53(C), pages 193-202.
    11. Bernardo Bortolotti & Mara Faccio, 2009. "Government Control of Privatized Firms," Review of Financial Studies, Society for Financial Studies, vol. 22(8), pages 2907-2939, August.
    12. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
    13. Bernardo Bortolotti & Carlo Cambini & Laura Rondi & Yossi Spiegel, 2011. "Capital Structure and Regulation: Do Ownership and Regulatory Independence Matter?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(2), pages 517-564, June.
    14. Mark Armstrong & David E.M. Sappington, 2006. "Regulation, Competition and Liberalization," Journal of Economic Literature, American Economic Association, vol. 44(2), pages 325-366, June.
    15. David Roodman, 2009. "A Note on the Theme of Too Many Instruments," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(1), pages 135-158, February.
    16. Guthrie, Graeme, 2006. "Regulating Infrastructure: The Impact on Risk and Investment," Working Paper Series 3851, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    17. Cabral, Luis M B & Riordan, Michael H, 1989. "Incentives for Cost Reduction under Price Cap Regulation," Journal of Regulatory Economics, Springer, vol. 1(2), pages 93-102, June.
    18. Roques, F.A. & Savva , N.S., 2006. "Price Cap Regulation and Investment Incentives under Demand Uncertainty," Cambridge Working Papers in Economics 0636, Faculty of Economics, University of Cambridge.
    19. Jamasb, T. & Pollitt, M., 2001. "International Benchmarking and Yardstick Regulation: An Application to European Electricity Utilities," Cambridge Working Papers in Economics 0115, Faculty of Economics, University of Cambridge.
    20. Ellen M. Pint, 1992. "Price-Cap versus Rate-of-Return Regulation in a Stochastic-Cost Model," RAND Journal of Economics, The RAND Corporation, vol. 23(4), pages 564-578, Winter.
    21. Guthrie, Graeme & Small, John & Wright, Julian, 2006. "Pricing access: Forward-looking versus backward-looking cost rules," European Economic Review, Elsevier, vol. 50(7), pages 1767-1789, October.
    22. Thomas P. Lyon & John W. Mayo, 2005. "Regulatory Opportunism and Investment Behavior: Evidence from the U.S. Electric Utility Industry," RAND Journal of Economics, The RAND Corporation, vol. 36(3), pages 628-644, Autumn.
    23. Christopher F Baum, 2006. "An Introduction to Modern Econometrics using Stata," Stata Press books, StataCorp LP, number imeus, April.
    24. Sweeney, George, 1981. "Adoption of Cost-Saving Innovations by a Regulated Firm," American Economic Review, American Economic Association, vol. 71(3), pages 437-447, June.
    25. Rahmatallah Poudineh & Tooraj Jamasb, 2013. "Investment and Efficiency under Incentive Regulation: The Case of the Norwegian Electricity Distribution Networks," Cambridge Working Papers in Economics 1310, Faculty of Economics, University of Cambridge.
    26. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474, March.
    27. Ian M. Dobbs, 2004. "Intertemporal price cap regulation under uncertainty," Economic Journal, Royal Economic Society, vol. 114(495), pages 421-440, April.
    28. Gary Biglaiser & Michael Riordan, 2000. "Dynamics of Price Regulation," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 744-767, Winter.
    29. Astrid Cullmann, 2012. "Benchmarking and firm heterogeneity: a latent class analysis for German electricity distribution companies," Empirical Economics, Springer, vol. 42(1), pages 147-169, February.
    30. Graeme Guthrie, 2006. "Regulating Infrastructure: The Impact on Risk and Investment," Journal of Economic Literature, American Economic Association, vol. 44(4), pages 925-972, December.
    31. Mehdi Farsi & Massimo Filippini & William Greene, 2006. "Application Of Panel Data Models In Benchmarking Analysis Of The Electricity Distribution Sector ," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 77(3), pages 271-290, September.
    32. Kumbhakar, Subal C. & Hjalmarsson, Lennart, 1998. "Relative performance of public and private ownership under yardstick competition: electricity retail distribution," European Economic Review, Elsevier, vol. 42(1), pages 97-122, January.
    33. David Martimort, 2006. "An Agency Perspective on the Costs and Benefits of Privatization," Journal of Regulatory Economics, Springer, vol. 30(1), pages 5-44, July.
    34. Veronika Grimm & Gregor Zoettl, 2013. "Investment Incentives and Electricity Spot Market Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 22(4), pages 832-851, December.
    35. E. Markou & C. Waddams Price, 1999. "UK utilities: Past reform and current proposals," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 70(3), pages 371-416, September.
    36. Clemenz, Gerhard, 1991. "Optimal Price-Cap Regulation," Journal of Industrial Economics, Wiley Blackwell, vol. 39(4), pages 391-408, June.
    37. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
    38. Jamasb, T. & Pollitt, M., 2000. "Benchmarking and regulation: international electricity experience," Utilities Policy, Elsevier, vol. 9(3), pages 107-130, September.
    39. Balazs Egert, 2009. "Infrastructure Investment in Network Industries: The Role of Incentive Regulation and Regulatory Independence," CESifo Working Paper Series 2642, CESifo Group Munich.
    40. Carlo Cambini & Laura Rondi, 2010. "Incentive regulation and investment: evidence from European energy utilities," Journal of Regulatory Economics, Springer, vol. 38(1), pages 1-26, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Enriquez, Alejandra & Ramirez, Jose Carlos & Rosellon, Juan, 2019. "Costos De Generación, Inversión Y Precios Del Sector Eléctrico En México
      [Generation Costs, Investment And Prices In The Electricity Sector In Mexico]
      ," MPRA Paper 98084, University Library of Munich, Germany.
    2. Filippini, M. & Greene, W. & Masiero, G., 2018. "Persistent and transient productive inefficiency in a regulated industry: electricity distribution," Energy Economics, Elsevier, vol. 69(C), pages 325-334.
    3. Elvira Silva & Pedro Macedo & Isabel Soares, 2019. "Maximum entropy: a stochastic frontier approach for electricity distribution regulation," Journal of Regulatory Economics, Springer, vol. 55(3), pages 237-257, June.
    4. Michael Hellwig & Dominik Schober & Luis Cabral, 2018. "Incentive Regulation: Evidence From German Electricity Networks," Working Papers 18-03, New York University, Leonard N. Stern School of Business, Department of Economics.
    5. Gugler, Klaus & Liebensteiner, Mario, 2019. "Productivity growth and incentive regulation in Austria's gas distribution," Energy Policy, Elsevier, vol. 134(C).
    6. Warren, Liz & Jack, Lisa, 2018. "The capital budgeting process and the energy trilemma - A strategic conduct analysis," The British Accounting Review, Elsevier, vol. 50(5), pages 481-496.
    7. Dengjun Zhang & Jinghua Xie, 2017. "Investment and revenue cap under incentive regulation: The case study of the Norwegian electricity distributors," Cogent Economics & Finance, Taylor & Francis Journals, vol. 5(1), pages 1400900-140, January.
    8. Nolting, Lars & Schuller, Vanessa & Gaumnitz, Felix & Praktiknjo, Aaron, 2019. "Incentivizing timely investments in electrical grids: Analysis of the amendment of the German distribution grid regulation," Energy Policy, Elsevier, vol. 132(C), pages 754-763.
    9. Matschoss, Patrick & Bayer, Benjamin & Thomas, Heiko & Marian, Adela, 2019. "The German incentive regulation and its practical impact on the grid integration of renewable energy systems," Renewable Energy, Elsevier, vol. 134(C), pages 727-738.

    More about this item

    Keywords

    Incentive regulation; Electricity distribution; Investments; Germany;

    JEL classification:

    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L98 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Government Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:57:y:2016:i:c:p:192-203. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/eneco .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.