Article
Regulation and Investment Incentives in Electricity Distribution: An Empirical Assessment
By: Astrid Cullmann & Maria Nieswand
March 2015
“In this paper we analyze the investment behavior of electricity distribution companies. First, we test whether the implementation of an incentive-based regulatory scheme with revenue caps impacts the firms’ investment decisions. Second, we test if the specific regulatory design to determine the revenue caps impacts the firms’ investment behavior. The analysis is based on a unique and detailed firm level data for German electricity distribution companies over the 2006-2012 period. Controlling for firm specific heterogeneity and ownership structure, we show that the investment rate is higher after the introduction of incentive regulation in 2009. Furthermore, we find that the specific institutional constraints for determining the revenue-caps embedded in the regulatory design, influence the investment decisions of the firms. Especially in the base year, when the rate base is determined for the following regulatory period, investments increase. The analysis demonstrates that the whole design of incentive regulation must be taken into account for a sound assessment of investment behavior in electricity distribution.”
