Refinancing under Yardstick Regulation with Investment Cycles – The Case of Long-Lived Electricity Network Assets

EWL Working Paper No. 21/2013

27 Pages Posted: 14 Jul 2014

See all articles by Dominik Schober

Dominik Schober

ZEW – Leibniz Centre for European Economic Research

Christoph Weber

University of Duisburg-Essen

Multiple version iconThere are 2 versions of this paper

Date Written: June 11, 2013

Abstract

In the context of yardstick regulation with long-lived assets, the influence of investment cycles and thereof resulting heterogeneous capital structures on the ability to recover capital is quite important. Investment decisions are based on whole investment cycles of the infrastructure. It is shown in this article that variable lifetimes of assets may cause substantial problems of capital-recovery under an efficient firm standard yardstick regulation based on historic (straight-line) depreciation. Resulting heterogeneous investment and cost cycles may cause instantaneous yardstick levels below the long-run refinancing level. Recovery is neither possible in later periods because of the efficient firm standard. An illustrating empirical example is used to demonstrate the relevance of the problem. Finally, two alternatives, branch average cost yardstick determination and correction factors based on the share of capital under depreciation, are discussed.

Keywords: electricity markets, yardstick regulation, benchmarking, infrastructure investment, capital-recovery, sustainable refinancing

JEL Classification: L51, L52

Suggested Citation

Schober, Dominik and Weber, Christoph, Refinancing under Yardstick Regulation with Investment Cycles – The Case of Long-Lived Electricity Network Assets (June 11, 2013). EWL Working Paper No. 21/2013. Available at SSRN: https://ssrn.com/abstract=2464196 or http://dx.doi.org/10.2139/ssrn.2464196

Dominik Schober

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Christoph Weber (Contact Author)

University of Duisburg-Essen ( email )

Universitätsstraße 2
Essen, 45141
Germany

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