Capital bias in the Nordic revenue cap regulation: Averch-Johnson critique revisited

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Capital bias in the Nordic revenue cap regulation : Averch-Johnson critique revisited. / Kuosmanen, Timo; Nguyen, Tuan.

In: Energy Policy, Vol. 139, 111355, 04.2020, p. 1-10.

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@article{37ffa4c562b54acd9bc6f2a87e554e92,
title = "Capital bias in the Nordic revenue cap regulation: Averch-Johnson critique revisited",
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 simulations reveal that relatively light handed regulation suffices to yield the main benefits.",
keywords = "Electricity transmission and distribution, Incentive regulation, Monopoly, Price-cap, Revenue-cap",
author = "Timo Kuosmanen and Tuan Nguyen",
year = "2020",
month = "4",
doi = "10.1016/j.enpol.2020.111355",
language = "English",
volume = "139",
pages = "1--10",
journal = "Energy Policy",
issn = "0301-4215",

}

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TY - JOUR

T1 - Capital bias in the Nordic revenue cap regulation

T2 - Averch-Johnson critique revisited

AU - Kuosmanen, Timo

AU - Nguyen, Tuan

PY - 2020/4

Y1 - 2020/4

N2 - 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 simulations reveal that relatively light handed regulation suffices to yield the main benefits.

AB - 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 simulations reveal that relatively light handed regulation suffices to yield the main benefits.

KW - Electricity transmission and distribution

KW - Incentive regulation

KW - Monopoly

KW - Price-cap

KW - Revenue-cap

U2 - 10.1016/j.enpol.2020.111355

DO - 10.1016/j.enpol.2020.111355

M3 - Article

VL - 139

SP - 1

EP - 10

JO - Energy Policy

JF - Energy Policy

SN - 0301-4215

M1 - 111355

ER -

ID: 41217226