Journal of Regulatory Economics

, Volume 46, Issue 2, pp 123–151

Idiosyncratic risk and the cost of capital: the case of electricity networks

  • Dominik Schober
  • Stephan Schaeffler
  • Christoph Weber
Original Article

DOI: 10.1007/s11149-013-9242-7

Cite this article as:
Schober, D., Schaeffler, S. & Weber, C. J Regul Econ (2014) 46: 123. doi:10.1007/s11149-013-9242-7
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Abstract

We analyze the treatment and impact of idiosyncratic or firm-specific risk in regulation. Regulatory authorities regularly ignore firm-specific characteristics, such as size or asset ages, implying different risk exposure in incentive regulation. In contrast, it is common to apply only a single benchmark, the weighted average cost of capital, uniformly to all firms. This will lead to implicit discrimination. We combine models of firm-specific risk, liquidity management and regulatory rate setting to investigate impacts on capital costs. We focus on the example of the impact of component failures for electricity network operators. In a simulation model for Germany, we find that capital costs increase by \(\sim \)0.2 to 3.0 % points depending on the size of the firm (in the range of 3–40 % of total cost of capital). Regulation of monopolistic bottlenecks should take these risks into account to avoid implicit discrimination.

Keywords

Idiosyncratic/firm-specific risk Discrimination Incentive-based and quality regulation Liquidity management  Size effects Electricity networks 

JEL Classification

G32 G33 L51 L94 

Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  • Dominik Schober
    • 1
    • 3
  • Stephan Schaeffler
    • 2
  • Christoph Weber
    • 3
  1. 1.ZEW Centre for European Economic Research and MaCCIMannheimGermany
  2. 2.Horvàth & Partners Management ConsultantsMunichGermany
  3. 3.Chair of Management Science and Energy EconomicsUniversity of Duisburg EssenEssenGermany

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