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An introduction to financial and economic modeling for utility regulators


  • Estache, Antonio
  • Rodriguez Pardina, Martin
  • Rodriguez, Jose Maria
  • Sember, German


The most effective regulators in developing countriesare following remarkably similar approaches. The main common element across"best practice"countries is the use of relatively simple quantitative models of operators'behavior and constraints to measure the impact of regulatory decisions on some key financial and economic indicators of concern to the operators, the users, and the government. The authors provide an introduction to the design and use of these models. They draw on lessons from international experience in industrial and developing countries in ordinary or extraordinary revisions and in the context of contract renegotiations. Simplifying somewhat, these models force regulators to recognize that, in the long run, private operators need to at least cover their opportunity cost of capital, including the various types of risks specific to the country, the sector, or the projects with which they are involved. Because these variables change over time, scheduled revisions are needed to allow for adjustments in the key determinants of the rate of return of the operator. These revisions are a recognition of the fact that all these determinants-tariffs, subsidies, quality, investments, and other service obligations-are interrelated and jointly determine the rate of return. At every revision, the rules of the game for the regulator are exactly the same: to figure out the changes in the cost of capital and to adjust the variables driving the rate of return to ensure that it continues to be consistent with the cost of capital. If they can draw on reasonable data, these models do everything any financial model would do for the day-to-day management of a company but take a longer term view and include an explicit identification of the key regulatory instruments. They can monitor the consistency between cash flow generated by the business on the one hand and debt service and operational expense needs on the other to address the main concerns of the operators. They can also account for a large number of key policy factors including access and affordability concerns for various types of consumers. They generally account for the sensitivity of operators and users to various regulatory design options.

Suggested Citation

  • Estache, Antonio & Rodriguez Pardina, Martin & Rodriguez, Jose Maria & Sember, German, 2003. "An introduction to financial and economic modeling for utility regulators," Policy Research Working Paper Series 3001, The World Bank.
  • Handle: RePEc:wbk:wbrwps:3001

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    References listed on IDEAS

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    Cited by:

    1. Rocha, Katia & Camacho, Fernando & Braganca, Gabriel, 2007. "Return on capital of Brazilian electricity distributors: A comparative analysis," Energy Policy, Elsevier, vol. 35(4), pages 2526-2537, April.
    2. Erdogdu, Erkan, 2005. "Energy market reforms in Turkey: An economic analysis," MPRA Paper 26929, University Library of Munich, Germany.
    3. Mehmet Ugur & David Sunderland (ed.), 2011. "Does Economic Governance Matter?," Books, Edward Elgar Publishing, number 14356.
    4. Vélez-Pareja, Ignacio, 2005. "Valoración de flujos de caja en inflación. El caso de la regulación en el Banco Mundial
      [Cash Flow Valuation in an Inflationary World. The Case of World Bank for Regulated Firms]
      ," MPRA Paper 12507, University Library of Munich, Germany, revised 05 Jan 2009.
    5. Cláudio de Araújo Wanderley & John Cullen & Mathew Tsamenyi, 2011. "Electricity Sector Reforms and the Tariff Review Process in Brazil," Chapters,in: Does Economic Governance Matter?, chapter 10 Edward Elgar Publishing.


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