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Optimal Depreciation, Payments to Capital, and Natural Monopoly Regulation

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  • Burness, H Stuart
  • Patrick, Robert H

Abstract

This paper examines optimal recovery of capital costs by the profit-maximizing firm operating under a rate-of-return constraint and for the regulator's problem of welfare maximization such that revenues are sufficient to cover economic costs. In this regard, the authors examine optimal depreciation schedules and time horizons for recovery, as well as the effects of stationary and nonstationary demand and cost conditions and a profit tax on the recovery paths. For the regulated firm seeking profits, once recovery begins, it continues at the most rapid rate until full recovery of costs occurs. In terms of the welfare objective, the regulator is required to commit to full recovery over a finite time period. For both the profit and welfare objectives, the optimal recovery requires "backloading" under a broad set of conditions (recovery increases through time, a practice that is contrary to extant rules). Copyright 1992 by Kluwer Academic Publishers

Suggested Citation

  • Burness, H Stuart & Patrick, Robert H, 1992. "Optimal Depreciation, Payments to Capital, and Natural Monopoly Regulation," Journal of Regulatory Economics, Springer, vol. 4(1), pages 35-50, March.
    • Handle: RePEc:kap:regeco:v:4:y:1992:i:1:p:35-50
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    Cited by:

    1. Dominik Schober, 2013. "Refinancing under Yardstick Regulation with Investment Cycles–The Case of Long-Lived Electricity Network Assets," EWL Working Papers 1321, University of Duisburg-Essen, Chair for Management Science and Energy Economics, revised Jun 2013.
    2. Küpper, Hans-Ulrich & Pedell, Burkhard, 2016. "Which asset valuation and depreciation method should be used for regulated utilities? An analytical and simulation-based comparison," Utilities Policy, Elsevier, vol. 40(C), pages 88-103.
    3. Wielhouwer, Jacco L. & Waegenaere, Anja De & Kort, Peter M., 2002. "Optimal tax depreciation under a progressive tax system," Journal of Economic Dynamics and Control, Elsevier, vol. 27(2), pages 243-269, December.
    4. Schober, Dominik & Weber, Christoph, 2015. "Refinancing under yardstick regulation with investment cycles: The case of long-lived electricity network assets," ZEW Discussion Papers 15-065, ZEW - Leibniz Centre for European Economic Research.
    5. Fellows, G. Kent, 2011. "Negotiated settlements with a cost of service backstop: The consequences for depreciation," Energy Policy, Elsevier, vol. 39(3), pages 1505-1513, March.
    6. Simshauser, Paul & Akimov, Alexandr, 2019. "Regulated electricity networks, investment mistakes in retrospect and stranded assets under uncertainty," Energy Economics, Elsevier, vol. 81(C), pages 117-133.
    7. Simshauser, Paul, 2017. "Monopoly regulation, discontinuity & stranded assets," Energy Economics, Elsevier, vol. 66(C), pages 384-398.

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