Capital bias in the Nordic revenue cap regulation

No Thumbnail Available
Access rights
openAccess
Journal Title
Journal ISSN
Volume Title
A1 Alkuperäisartikkeli tieteellisessä aikakauslehdessä
Date
2020-04
Major/Subject
Mcode
Degree programme
Language
en
Pages
Series
Energy Policy, Volume 139
Abstract
Nordic energy market reform and the regulation of local monopolies in electricity transmission and distribution sectors have served as role models for many other countries worldwide. The first contribution of this paper is to clarify the conceptual distinction between the Nordic revenue cap approach and the British revenue cap regulation. Our second contribution is to show that the Nordic revenue cap is similar to the U.S.-style rate of return regulation in that both are subject to capital bias, known as the Averch-Johnson effect. The third contribution of this paper is to examine the magnitude of the capital bias and its welfare effects by means of numerical simulations. We show that the Nordic revenue cap generally decreases the monopoly profit, increases the output, decreases the price, and hence increases consumer surplus compared to the unregulated monopoly. The simulation results prove robust to changes in the parameter values and the functional form of the production function. Our numerical simulationsreveal that relatively light handed regulation suffices to yield the main benefits.
Description
Keywords
Electricity transmission and distribution, Incentive regulation, Monopoly, Price-cap, Revenue-cap
Other note
Citation
Kuosmanen , T & Nguyen , T 2020 , ' Capital bias in the Nordic revenue cap regulation : Averch-Johnson critique revisited ' , Energy Policy , vol. 139 , 111355 , pp. 1-10 . https://doi.org/10.1016/j.enpol.2020.111355