Regulating Infrastructure: The Impact on Risk and Investment

63 Pages Posted: 5 Aug 2005

See all articles by Graeme Guthrie

Graeme Guthrie

Victoria University of Wellington - School of Economics & Finance

Date Written: October 7, 2005

Abstract

The last thirty years have witnessed a fundamental change in the regulation of infrastructure industries. Whereas firms were subject to rate of return regulation and protected from entry in the past, now they face various forms of incentive regulation, competition is actively promoted by many regulators, and both regulators and the firms they regulate must often confront rapid technological progress. This paper surveys the literature on the investment implications of different regulatory schemes, highlighting the relevance of modern investment theory, which puts risk and intertemporal issues, such as the irreversibility of much infrastructure investment, center stage. It discusses the impact on regulated monopolists' investment behavior of key regulatory characteristics, namely the price flexibility allowed by the regulator, the length of the regulatory cycle, and the costs the regulator will allow the firm to recover at future regulatory hearings. It also considers the impact of competition, especially the situation where a vertically integrated firm has its operation of a bottleneck asset regulated, on investment by regulated firms and their competitors.

Keywords: regulation, investment

JEL Classification: G31, L51, L9

Suggested Citation

Guthrie, Graeme, Regulating Infrastructure: The Impact on Risk and Investment (October 7, 2005). Available at SSRN: https://ssrn.com/abstract=757014 or http://dx.doi.org/10.2139/ssrn.757014

Graeme Guthrie (Contact Author)

Victoria University of Wellington - School of Economics & Finance ( email )

P.O. Box 600
Wellington 6140
New Zealand
64 4 463 5763 (Phone)

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