Regulation and Investment Incentives in Electricity Distribution: An Empirical Assessment

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractWe analyze the effects of an incentive based regulatory scheme with revenue caps on the investment behaviors and decisions of 109 electricity distribution companies operating in Germany in 2006-2012. We hypothesize that Germany's implementation of incentive regulation in 2009 has a negative impact on total investment, and that firms increase their investments in the base year. We build a model that controls for both firm-specific heterogeneity and ownership structure and test it with the German data. The results show that investments increase after incentive regulation, and that the institutional constraints used to determine the revenue caps influence the distribution companies' investment decisions. We also note that the investments increase in the base year when the rate base is determined for the following regulatory period. We conclude that a comprehensive assessment of Germany's electricity distribution companies' investment decisions and behaviors should account for firm specific heterogeneity. It should further include all institutional aspects of incentive regulation to design incentives that will foster investments in the region's energy networks.JEL-Classification: L94, L51, L98

Incentive Regulation: Evidence From German Electricity Networks

“…However, we abstain from calculating the welfare effects directly using our DiD coefficients. 39 Doing so would imply to assume that DSOs in the revenue-cap regime would face the same cost-38 Compared to Cullmann and Nieswand (2016), who find increased investment in the base year, our findings are not contradictory. We only find that there is no difference between the regulatory regimes.…”

“…Beyond this general characterization, two papers are particularly germane to ours and deserve special mention. Like us, Cullmann and Nieswand (2016) study the investment behavior of German DSOs. They measure an increase in investment after the introduction of incentive regulation, especially in the base year.…”

Maximum entropy: a stochastic frontier approach for electricity distribution regulation

“…Investments are also induced by new loads such as electric vehicles, and the widespread use of smart metering systems which imply very large investments for the distribution utilities. Given that distribution utilities are regulated, the design of incentive mechanisms becomes crucial for the energy sector (e.g., Cambini et al 2014;Banovac et al 2009;Cullmann and Nieswand 2016).…”

Investment in OECD Countries: a Primer

“…Empirically, there is evidence that regulatory independence boosts investment, especially in electricity and telecommunications (Cambini and Rondi, 2011). Incentive regulation might also help investment (Cullmann and Nieswand, 2016), especially when combined with an independent regulator (Égert, 2009). However, setting access prices for users of infrastructure is challenging for the regulator, with the possibility of too low a price leading to underinvestment and too high a price leading to inefficient bypass (Vogelsang, 2010).…”