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

SSRN Electronic Journal, 2015

We compare two instruments to regulate a monopoly that has private information about its demand or costs: fixing either the price or quantity. For each instrument, we consider sophisticated (screening) and simple (bunching) mechanisms. We characterize the optimal mechanisms and compare their welfare performance. With unknown demand and increasing marginal costs, the sophisticated price mechanism dominates that of quantity, whereas the sophisticated quantity mechanism may prevail when marginal costs decrease. The simple price mechanism dominates that of quantity when marginal costs decrease, but the opposite may arise if marginal costs increase. With unknown costs, both instruments are equivalent.

2004

When computing regulated prices, the standard method is the capital asset pricing model (CAPM) which involves the estimation of a single parameter: the beta of the company. Yet, these computational methods fail to take into account any preference the regulator might have to increase or decrease the beta to favour or punish investors or customers. We propose such a methodology based on what we call a Linex linear optimal method.

A Lump Sum Tax has very different effects when imposed upon a rate-of-return regulated monopolist, such as an electric utility compared to the more commonly analyzed unregulated monopolist. We find that contrary to the case of an unregulated monopolist a lump-sum tax does reduce output if capital is not an inferior input in the production process. Hence, it will raise the price. In this paper, we have formally developed three propositions regarding the impact of such a tax on labor, capital, and output.

The B.E. Journal of Economic Analysis & Policy, 2007

To avoid high profit levels often experienced in countries where monopolies in public utility sectors are regulated through price-cap mechanisms, several regulatory agencies have recently introduced profit-sharing (PS) clauses aimed at obtaining price reductions to the benefit of consumers. However, the implementation of these PS clauses has often turned out to be severely con-trained by the incompleteness of the price-cap itself and the non-verifiability of firms'profits. This paper studies the properties of a second-best optimal PS mechanism designed by the regulator to induce the regulated monopolist to divert part of its profits to custormers. In a dynamic model where a reg-ulated monopolist manages a long-term franchise contract and the regulator has the option to revoke the contract if there are serious welfare losses, we first derive the welfare maximising PS mechanism under verifiability of prof-its. Subsequently, we explore the sustainability of the PS mechanism under non-verifiability of profits. In a infinitehorizon game, it is showed that the dynamic sustainability of the PS clause crucially depends upon the magni-tude of the regulator's revocation cost: the higher this cost, the lower the profit shared and the less frequent the regulator's PS introduction. Finally, we present the endogenous and dynamic price adjustment which follows the adoption of the investigated PS mechanism in a price-cap regulation setting.

SSRN Electronic Journal, 2000

We construct a comprehensive panel data of 96 publicly traded European utilities over the period 1994-2005 in order to study the relationship between the capital structure of regulated firms, regulated prices, and investments, and examine if and how this interaction is affected by ownership structure. We show that firms in our sample increase their leverage after becoming regulated by an independent regulatory agency, but only if they are privately controlled. Moreover, we find that the leverage of these firms has a positive and significant effect on regulated prices, but not vice versa, and it also has a positive and significant effect on their investment levels. Our results are consistent with the theory that privately-controlled firms use leverage strategically to shield themselves against regulatory opportunism.

2007

We consider a monopoly that generates externalities. These depend on either the volume of services provided, or the number of clients, or both. We study the socially optimal prices and propose a regulatory mechanism to decentralize the optimum allocation. The mechanism, which is an gen-eralised version of the price-cap scheme, only requires standard accounting data and straightforward estimates of the social marginal costs/benefits of externalities.

We study how to regulate a monopolistic firm using a robust-design, non-Bayesian approach. We derive a policy that minimizes the regulator's worst-case regret, where regret is the difference between the regulator's complete-information payoff and his realized payoff. When the regulator's payoff is consumers' surplus, he caps the firm's average revenue. When his payoff is the total surplus of both consumers and the firm, he offers a piece-rate subsidy to the firm while capping the total subsidy. For intermediate cases, the regulator combines these three policy instruments to balance three goals: protecting consumers' surplus, mitigating underproduction, and limiting potential overproduction.

DISCUSSION PAPERS IN ECONOMICS- …, 2001

In this paper we consider a regulated monopoly that can pad its costs to increase its cost reimbursement. Even while padding is inefficient the optimal incentive scheme tolerates some padding of costs to reduce the information rents paid to low cost types. It is shown that high cost firms pad costs more than low cost firms. We also show that cost padding moves pricing away from Ramsay optimal pricing toward more monopolistic pricing rules. We show that when auditing of total costs is costly, low cost firms face a fixed price contract and engage in no cost padding. High cost firms do less well but do engage in padding to increase the verified cost. If padded costs can be audited at some cost, low cost types engage in cost padding but high cost types do not. We also endogenize the distribution of cost types by allowing firms to engage in a pre-contractual, non-observable or verifiable cost-reducing investment. The firm adopts a mixed strategy and this determines the distribution of cost types at the contracting stage. An example is given to show how the equilibrium distribution is computed.

2015

The optimal regulatory framework of utilities seeks to resolve an inherent conflict between the interests of consumers and investors. On the one hand, to attract investment, the regulator has to assure the utility that the sunk cost of capital will be rewarded appropriately, and prices will be set to cover