Regulation of network infrastructure investments: an experimental evaluation
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This paper reports the results of an experiment evaluating three regulatory schemes for network infrastructure, in terms of their ability to generate efficient levels of capacity investment. We compare the performance of (1) price cap regulation, (2) a regulatory holiday for new capacity, and (3) price cap regulation with long term contracts combined with a secondary market. The setting is one in which network users can benefit from acting strategically, and are better informed than the network operator about demand growth. We find that the regulatory holiday creates an incentive to underinvest relative to optimal levels. Long term contracts also fail to improve on single price-cap regulation, and may reduce investment by providing noisier signals about future demand.
KeywordsInfrastructure investment Experiment Price cap Regulatory holiday
JEL ClassificationC9 L51 L95
The authors thank two anonymous referees, Christoph Engel, Machiel Mulder, Jo Van Biesebroeck, Christian von Hirschhausen, David Newbery, Stef Proost, Juan Rosselón and Ingo Vogelsang, as well as seminar participants at Tilburg University, Groningen University, the Research Institute of Industrial Economics Stockholm, K.U. Leuven, the 2009 International ESA Conference inWashington DC, the Toulouse Energy Conference 2009, the 2009 Infraday Conference in Berlin, the 2010 CLEEN workshop in Amsterdam, the 2011 IAEE conference in Stockholm, the 2011 ESA Conference in Luxemburg, the 2011 CRNI Conference in Brussels for their comments. The authors are responsible for any remaining mistakes. Bert Willems was the recipient of a Marie Curie Intra European Fellowship (PIEF-GA-2008-221085). He thanks the Electricity Policy Group at Cambridge University for their hospitality. Funding by the NMa and CentER for conducting the experiments is gratefully acknowledged. This paper builds upon TILEC report 2010-01, a project conducted in collaboration with the ERGEG’s Gas Regulators Initiative North-Western Europe (GRI NW).
This article is distributed under the terms of the Creative Commons Attribution License which permits any use, distribution, and reproduction in any medium, provided the original author(s) and the source are credited.
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