IDEAS home Printed from https://ideas.repec.org/p/cam/camdae/1853.html
   My bibliography  Save this paper

Regulated electricity networks, investment mistakes in retrospect and stranded assets under uncertainty

Author

Listed:
  • Simshauser, P.
  • Akimov, A.

Abstract

From 2004 to 2018 the Regulatory Asset Base (RAB) of electricity networks across Australia’s National Electricity Market tripled in value, from $32 billion to $93 billion. The run-up in the capital stock was driven by forecast demand growth and a tightening of reliability standards. But demand contracted from 2010-2015. With a rising RAB, contracting demand and a regulated revenue constraint, an adverse cycle of sharply rising tariffs and falling demand appeared to be emerging. Some networks were characterised by significant investment mistakes in retrospect, and perhaps unsurprisingly, various consumer groups and regulatory bodies argued assets should be stranded or written-off completely and network tariffs reduced. From 2015-2018, energy demand increased once again. In this article we present a method for dealing with stranded assets under uncertainty; rather than permanently stranding assets that fail a used and useful test, we reorganise the financial and economic affairs of a template network utility and “Park” excess capacity, issue credit-wrapped bonds to temporarily finance the stranded capital stock, then re-test the Parked Assets at the end of each five-year regulatory determination. Parked Assets can then be “Un-Parked” and returned-to-service in line with connections growth, load growth, or both. The most interesting result is the immediate reduction in network tariffs, and a more stable trajectory under our generalised assumptions.

Suggested Citation

  • Simshauser, P. & Akimov, A., 2018. "Regulated electricity networks, investment mistakes in retrospect and stranded assets under uncertainty," Cambridge Working Papers in Economics 1853, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:1853
    as

    Download full text from publisher

    File URL: http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1853.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Christopher Decker, 2016. "Regulating networks in decline," Journal of Regulatory Economics, Springer, vol. 49(3), pages 344-370, June.
    2. Paul Simshauser, 2014. "From First Place to Last: The National Electricity Market's Policy-Induced ‘Energy Market Death Spiral’," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 47(4), pages 540-562, December.
    3. Brennan, Timothy J & Boyd, James, 1997. "Stranded Costs, Takings, and the Law and Economics of Implicit Constracts," Journal of Regulatory Economics, Springer, vol. 11(1), pages 41-54, January.
    4. Lucas Kruitwagen & Kaveh Madani & Ben Caldecott & Mark H. W. Workman, 2017. "Game theory and corporate governance: conditions for effective stewardship of companies exposed to climate change risks," Journal of Sustainable Finance & Investment, Taylor & Francis Journals, vol. 7(1), pages 14-36, January.
    5. Bob Buhr, 2017. "Assessing the sources of stranded asset risk: a proposed framework," Journal of Sustainable Finance & Investment, Taylor & Francis Journals, vol. 7(1), pages 37-53, January.
    6. Stewart C. Myers, 1972. "The Application of Finance Theory to Public Utility Rate Cases," Bell Journal of Economics, The RAND Corporation, vol. 3(1), pages 58-97, Spring.
    7. Howard Covington, 2017. "Investment consequences of the Paris climate agreement," Journal of Sustainable Finance & Investment, Taylor & Francis Journals, vol. 7(1), pages 54-63, January.
    8. Paul Simshauser, 2014. "The cost of capital for power generation in atypical capital market conditions," Economic Analysis and Policy, Elsevier, vol. 44(2), pages 184-201.
    9. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring.
    10. Nelson, Tim & Orton, Fiona, 2013. "A new approach to congestion pricing in electricity markets: Improving user pays pricing incentives," Energy Economics, Elsevier, vol. 40(C), pages 1-7.
    11. Madian, Alan L., 1997. "Meaningful restructuring: resolving the stranded cost dilemma," The Electricity Journal, Elsevier, vol. 10(1), pages 62-71.
    12. 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.
    13. Schmalensee, Richard, 1989. "An Expository Note on Depreciation and Profitability under Rate-of-Return Regulation," Journal of Regulatory Economics, Springer, vol. 1(3), pages 293-298, September.
    14. Simshauser, Paul, 2018. "Price discrimination and the modes of failure in deregulated retail electricity markets," Energy Economics, Elsevier, vol. 75(C), pages 54-70.
    15. Ben Caldecott, 2017. "Introduction to special issue: stranded assets and the environment," Journal of Sustainable Finance & Investment, Taylor & Francis Journals, vol. 7(1), pages 1-13, January.
    16. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    17. Simshauser, Paul, 2019. "Missing money, missing policy and Resource Adequacy in Australia's National Electricity Market," Utilities Policy, Elsevier, vol. 60(C), pages 1-1.
    18. Joskow, Paul L., 1996. "Does stranded cost recovery distort competition?," The Electricity Journal, Elsevier, vol. 9(3), pages 31-45, April.
    19. Julia D’Souza & John Jacob, 2001. "Electric Utility Stranded Costs: Valuation and Disclosure Issues," Journal of Accounting Research, Wiley Blackwell, vol. 39(3), pages 495-512, December.
    20. James Boyd, 1998. "The "Regulatory Compact" and Implicit Contracts: Should Stranded Costs be Recoverable?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 69-83.
    21. Tye, William B. & Graves, Frank C., 1996. "Stranded cost recovery and competition on equal terms," The Electricity Journal, Elsevier, vol. 9(10), pages 61-70, December.
    22. Joskow, Paul L., 1996. "How will it all end? the electric utility industry in 2005," The Electricity Journal, Elsevier, vol. 9(1), pages 67-73.
    23. Richard A. Posner, 1974. "Theories of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 5(2), pages 335-358, Autumn.
    24. Wen, Shiow-Ying & Tschirhart, John, 1997. "Non Utility Power, Alternative Regulatory Regimes and Stranded Investment," Journal of Regulatory Economics, Springer, vol. 12(3), pages 291-310, November.
    25. Jemma Green & Peter Newman, 2017. "Disruptive innovation, stranded assets and forecasting: the rise and rise of renewable energy," Journal of Sustainable Finance & Investment, Taylor & Francis Journals, vol. 7(2), pages 169-187, April.
    26. Stratford Douglas & Thomas A. Garrett & Russell M. Rhine, 2009. "Disallowances and overcapitalization in the U.S. electric utility industry," Review, Federal Reserve Bank of St. Louis, vol. 91(Jan), pages 23-32.
    27. Beard, T. Randolph & Kaserman, David L. & Mayo, John W., 2003. "Regulation, competition, and the optimal recovery of stranded costs," International Journal of Industrial Organization, Elsevier, vol. 21(6), pages 831-848, June.
    28. Peltzman, Sam, 1976. "Toward a More General Theory of Regulation," Journal of Law and Economics, University of Chicago Press, vol. 19(2), pages 211-240, August.
    29. Navarro, Peter, 1996. "Ten key questions for the restructuring regulator," The Electricity Journal, Elsevier, vol. 9(7), pages 65-70.
    30. Woo, C.K & Lloyd, D & Karimov, R & Tishler, A, 2003. "Stranded cost recovery in electricity market reforms in the US," Energy, Elsevier, vol. 28(1), pages 1-14.
    31. Simshauser, Paul, 2016. "Distribution network prices and solar PV: Resolving rate instability and wealth transfers through demand tariffs," Energy Economics, Elsevier, vol. 54(C), pages 108-122.
    32. Ritschel, Alexander & Smestad, Greg P., 2003. "Energy subsidies in California's electricity market deregulation," Energy Policy, Elsevier, vol. 31(13), pages 1379-1391, October.
    33. Nicholas Silver, 2017. "Blindness to risk: why institutional investors ignore the risk of stranded assets," Journal of Sustainable Finance & Investment, Taylor & Francis Journals, vol. 7(1), pages 99-113, January.
    34. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
    35. Crawford, Garth, 2015. "Network depreciation and energy market disruption: Options to avoiding passing costs down the line," Economic Analysis and Policy, Elsevier, vol. 48(C), pages 163-171.
    36. Simshauser, Paul, 2017. "Monopoly regulation, discontinuity & stranded assets," Energy Economics, Elsevier, vol. 66(C), pages 384-398.
    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. Batlle, Carlos & Mastropietro, Paolo & Rodilla, Pablo, 2020. "Redesigning residual cost allocation in electricity tariffs: A proposal to balance efficiency, equity and cost recovery," Renewable Energy, Elsevier, vol. 155(C), pages 257-266.
    2. Ansari, Dawud & Holz, Franziska, 2020. "Between stranded assets and green transformation: Fossil-fuel-producing developing countries towards 2055," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics.
    3. Yan, Guan & Trück, Stefan, 2020. "A dynamic network analysis of spot electricity prices in the Australian national electricity market," Energy Economics, Elsevier, vol. 92(C).
    4. Simshauser, P., 2021. "Renewable Energy Zones in Australia’s National Electricity Market," Cambridge Working Papers in Economics 2119, Faculty of Economics, University of Cambridge.
    5. Simshauser, P., 2019. "Lessons from Australia’s National Electricity Market 1998-2018: the strengths and weaknesses of the reform experience," Cambridge Working Papers in Economics 1972, Faculty of Economics, University of Cambridge.
    6. Guthrie, Graeme, 2020. "Regulation, welfare, and the risk of asset stranding," The Quarterly Review of Economics and Finance, Elsevier, vol. 78(C), pages 273-287.
    7. Khezr, Peyman & Nepal, Rabindra, 2021. "On the viability of energy-capacity markets under decreasing marginal costs," Energy Economics, Elsevier, vol. 96(C).
    8. Alan Rai & Tim Nelson, 2020. "Australia's National Electricity Market after Twenty Years," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 53(2), pages 165-182, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Simshauser, Paul, 2017. "Monopoly regulation, discontinuity & stranded assets," Energy Economics, Elsevier, vol. 66(C), pages 384-398.
    2. Simshauser, P., 2020. "Merchant utilities and boundaries of the firm: vertical integration in energy-only markets," Cambridge Working Papers in Economics 2039, Faculty of Economics, University of Cambridge.
    3. Guthrie, Graeme, 2020. "Regulation, welfare, and the risk of asset stranding," The Quarterly Review of Economics and Finance, Elsevier, vol. 78(C), pages 273-287.
    4. Simshauser, Paul, 2018. "Price discrimination and the modes of failure in deregulated retail electricity markets," Energy Economics, Elsevier, vol. 75(C), pages 54-70.
    5. Ansari, Dawud & Holz, Franziska, 2020. "Between stranded assets and green transformation: Fossil-fuel-producing developing countries towards 2055," World Development, Elsevier, vol. 130(C).
    6. Söderberg, Magnus & Menezes, Flavio M. & Santolino, Miguel, 2018. "Regulatory behaviour under threat of court reversal: Theory and evidence from the Swedish electricity market," Energy Economics, Elsevier, vol. 71(C), pages 302-310.
    7. 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.
    8. Connelly, J. Thomas & Limpaphayom, Piman & Nguyen, Hien T. & Tran, Thanh D., 2017. "A tale of two cities: Economic development, corporate governance and firm value in Vietnam," Research in International Business and Finance, Elsevier, vol. 42(C), pages 102-123.
    9. Petar Stankov, 2017. "Economic Freedom and Welfare Before and After the Crisis," Springer Books, Springer, number 978-3-319-62497-6, July.
    10. Yuan, Jiahai & Guo, Xiaoxuan & Zhang, Weirong & Chen, Sisi & Ai, Yu & Zhao, Changhong, 2019. "Deregulation of power generation planning and elimination of coal power subsidy in China," Utilities Policy, Elsevier, vol. 57(C), pages 1-15.
    11. Pirrong, Stephen Craig, 1995. "The Self-Regulation of Commodity Exchanges: The Case of Market Manipulation," Journal of Law and Economics, University of Chicago Press, vol. 38(1), pages 141-206, April.
    12. Contractor, Farok J. & Dangol, Ramesh & Nuruzzaman, N. & Raghunath, S., 2020. "How do country regulations and business environment impact foreign direct investment (FDI) inflows?," International Business Review, Elsevier, vol. 29(2).
    13. Tim Nelson & Stephanie Bashir & Eleanor McCracken-Hewson & Michael Pierce, 2017. "The Changing Nature of the Australian Electricity Industry," Economic Papers, The Economic Society of Australia, vol. 36(2), pages 104-120, June.
    14. Papadimitri, Panagiota & Pasiouras, Fotios & Pescetto, Gioia & Wohlschlegel, Ansgar, 2021. "Does political influence distort banking regulation? Evidence from the US," Journal of Financial Stability, Elsevier, vol. 53(C).
    15. Rotoli, Francesco & Valeri, Eva & Ricci, Stefano & Rizzetto, Luca & Malavasi, Gabriele, 2018. "An analysis of the railway access charges regime in the Italian context," Transport Policy, Elsevier, vol. 64(C), pages 20-28.
    16. Silvers, Roger, 2020. "Cross-border cooperation between securities regulators," Journal of Accounting and Economics, Elsevier, vol. 69(2).
    17. Knieps, Günter & Weiß, Hans-Jörg, 2008. "Regulatory agencies and regulatory risk," Discussion Papers 118 [rev.], University of Freiburg, Institute for Transport Economics and Regional Policy.
    18. Rode, David C. & Fischbeck, Paul S., 2019. "Regulated equity returns: A puzzle," Energy Policy, Elsevier, vol. 133(C).
    19. Tim Nelson, 2017. "Redesigning a 20th century regulatory framework to deliver 21st century energy technology," Journal of Bioeconomics, Springer, vol. 19(1), pages 147-164, April.
    20. Bel, Germà, 2020. "Public versus private water delivery, remunicipalization and water tariffs," Utilities Policy, Elsevier, vol. 62(C).

    More about this item

    Keywords

    Electricity Utilities; Falling Demand; Stranded Assets;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L9 - Industrial Organization - - Industry Studies: Transportation and Utilities
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:cam:camdae:1853. 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: . General contact details of provider: http://www.econ.cam.ac.uk/ .

    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 bibliographic 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Jake Dyer (email available below). General contact details of provider: http://www.econ.cam.ac.uk/ .

    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.