De Economist

, Volume 166, Issue 1, pp 41–62 | Cite as

The Impact of Regulation on Utilities’ Investments: A Survey and New Evidence from the Energy Industry



Over the last 30 years, regulated sectors have undergone deep reforms in their institutional configuration, tools and goals. This paper reviews the impact of this evolution on energy firms’ investments. First, we survey the existing evidence on the effects of the presence of independent regulatory agencies on utilities’ investment rates in Europe in the MENA countries, and in Latin America, focussing on the role of de facto independence and the institutional framework. Second, we discuss the impact of incentive- versus rate-of-return regulation on firms’ incentives to invest and the interaction with firm private/public ownership. In this regard, we provide new econometric evidence of the recent developments of regulation, using a sample of European energy utilities tracked from 1997 to 2013. Our results confirm previous findings that investment is higher under incentive regulation than under rate of return regulation. However, differently from the earlier results, we find that investments seem to be driven more by the weighted average cost of capital than by the X-factor. The paper concludes reviewing recent evidence on service quality regulation on firm investment specifically on the impact of reward/penalty schemes on capital and operational expenditures.


Regulatory institutions Agency independence Incentive regulation Investment Service quality 

JEL Classification

L51 L94 L95 D92 


  1. Abrardi, L., Cambini, C., & Rondi, L. (2016). Investment and regulation in MENA countries: The impact of regulatory independence. In A. Rubino, V. Lenzi, I. Ozturk, & M. T. Costa Campi (Eds.), Regulation and investments in energy markets. Solutions for the Mediterranean (pp. 242–273). Amsterdam: Elsevier.Google Scholar
  2. Aghion, P., Algan, Y., Cahuc, P., & Shleifer, A. (2012). Regulation and distrust. Quarterly Journal of Economics, 125(3), 1015–1049.CrossRefGoogle Scholar
  3. Ai, C., & Sappington, D. E. M. (2002). The impact of state incentive regulation on the U.S. telecommunications industry. Journal of Regulatory Economics, 22(2), 107–132.CrossRefGoogle Scholar
  4. Alesina, A., Ardagna, S., Nicoletti, G., & Schiantarelli, F. (2005). Regulation and investment. Journal of European Economic Association, 3(4), 791–825.CrossRefGoogle Scholar
  5. Alesina, A., Ozler, S., Roubini, N., & Swagel, P. (1996). Political instability and economic growth. Journal of Economic Growth, 1(2), 189–211.CrossRefGoogle Scholar
  6. Andres, L., Foster, V., & Guasch, J. L. (2006). The impact of privatization on the performance of the infrastructure sector: The case of electricity distribution in Latin American countries. World Bank policy research, Working paper 3936.Google Scholar
  7. Andres, L., Guasch, J. L., Diop, M., & Lopez, S. (2007). Assessing the governance of electricity regulatory agencies in the Latin American and Caribbean region: A benchmarking analysis. World Bank Policy Research, Working Paper Series, 4380.Google Scholar
  8. Andres, L., Guasch, J. L., & Lopez, Azumendi, S. (2008). Regulatory governance and sector performance: Methodology and evaluation for electricity distribution in Latin America. World Bank Policy Research, Working Paper 4494.Google Scholar
  9. Armstrong, M., & Sappington, D. (2007). Recent developments in the theory of regulation. In M. Armstrong & R. Porter (Eds.), Handbook of industrial organization (Vol. III). Amsterdam: Elsevier.Google Scholar
  10. Armstrong, M., & Sappington, D. E. M. (2006). Regulation, competition and liberalization. Journal of Economic Literature, XLIV, 325–366. June.CrossRefGoogle Scholar
  11. Averch, H., & Johnson, L. L. (1962). Behavior of the firm under regulatory constraint. American Economic Review, 52, 1059–1069.Google Scholar
  12. Biglaiser, G., & Riordan, M. (2000). Dynamics of price regulation. RAND Journal of Economics, 31(4), 744–767.CrossRefGoogle Scholar
  13. Blank, L., & Mayo, J. W. (2009). Endogenous regulatory constraints and the emergence of hybrid regulation. Review of Industrial Organization, 35, 233–255.CrossRefGoogle Scholar
  14. Bortolotti, B., Cambini, C., & Rondi, L. (2013). Reluctant regulation. Journal of Comparative Economics, 41(3), 804–828.CrossRefGoogle Scholar
  15. Cabral, L., & Riordan, M. (1989). Incentives for cost reduction under price cap regulation. Journal of Regulatory Economics, 1, 93–102.CrossRefGoogle Scholar
  16. Cambini, C., Fumagalli, E., & Rondi, L. (2016). Incentives to quality and investment: Evidence from electricity distribution in Italy. Journal of Regulatory Economics, 49(1), 1–32.CrossRefGoogle Scholar
  17. Cambini, C., & Rondi, L. (2010). Incentive regulation and investment. Evidence from the European energy utilities. Journal of Regulatory Economics, 38(1), 1–26.CrossRefGoogle Scholar
  18. Cambini, C., & Rondi, L. (2017). Independent agencies, political interference and firm investment. Evidence from the European Union. Economic Inquiry, 55(1), 281–304.CrossRefGoogle Scholar
  19. Correa, P., Pereira, C., Mueller, B., & Melo, M. (2006). Regulatory governance in infrastructure industries: Assessment and measurement of Brazilian 193 regulators. Public–private infrastructure advisory facility. Washington, DC: The World Bank.CrossRefGoogle Scholar
  20. Cubbin, J., & Stern, J. (2006). The impact of regulatory governance and privatization on electricity industry generation capacity in developing economies. The World Bank Economic Review, 20(1), 115–141.CrossRefGoogle Scholar
  21. Domah, P. D., & Pollitt, M. G. (2001). The restructuring and privatisation of the regional electricity companies in England and Wales: A social cost benefit analysis. Fiscal Studies, 22, 107–146.CrossRefGoogle Scholar
  22. Ernst, & Young. (2013). Mapping power and utilities regulation in Europe.Google Scholar
  23. Estache, A., & Rodriguez-Pardina, M. (1998). Light and lightening at the end of the public tunnel: The reform of the electricity sector in the Southern Cone. World Bank Working Paper.Google Scholar
  24. Fazzari, Steven M., Hubbard, R. Glenn, & Petersen, Bruce. (1988). Financing constraints and corporate investment. Brookings Papers on Economic Activity, 1, 141–196.CrossRefGoogle Scholar
  25. Greenstein, S., McMaster, S., & Spiller, P. (1995). The effect of incentive regulation on infrastructure modernization: Local exchange companies’ deployment of digital technology. Journal of Economics & Management Strategy, 4(2), 187–236.CrossRefGoogle Scholar
  26. Guthrie, G. (2006). Regulating infrastructure: The impact on risk and investment. Journal of Economic Literature, 44(4), 925–972.CrossRefGoogle Scholar
  27. Gutiérrez, L. H. (2003). The effect of endogenous regulation on telecommunications expansion and efficiency in Latin America. Journal of Regulatory Economics, 23(3), 257–286.CrossRefGoogle Scholar
  28. Innovation Electricity Efficiency – IEE (2013) State electric efficiency regulatory frameworks. The Edison Foundation Report, July 2013. Available from:
  29. Joskow, P. L. (2007). Regulation of natural monopolies. In A. M. Polinsky & S. Shavell (Eds.), Handbook of law and economics. Amsterdam: Elsevier.Google Scholar
  30. Joskow, P. L. (2008). Incentive regulation and its application to electricity networks. Review of Network Economics, 7(4), 547–560.CrossRefGoogle Scholar
  31. Knack, S., & Keefer, P. (1997). Does social capital have an economic payoff? A cross-country investigation. Quarterly Journal of Economics, 112(4), 1251–1288.CrossRefGoogle Scholar
  32. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. (1997). Legal determinants of external finance. Journal of Finance, LII(3), 1131–1150.CrossRefGoogle Scholar
  33. Laffont, J.-J. (1994). The new economics of regulation ten years after. Econometrica, 62(3), 507–537.CrossRefGoogle Scholar
  34. Laffont, J.-J., & Tirole, J. (2000). A theory of incentives in regulation and procurement. Cambridge, MA: MIT Press.Google Scholar
  35. Levi, B., & Spiller, T. (1994). The institutional foundations of regulatory commitment: A comparative analysis of telecommunications regulation. Journal of Law, Economics & Organization, 10(2), 201–246.Google Scholar
  36. Littlechild, S. C. (1983). Regulation of British telecommunications profitability. London: HMSO.Google Scholar
  37. Lyon, T., & Mayo, J. (2005). Regulatory opportunism and investment behavior: Evidence from the U.S. electric utility industry. Rand Journal of Economics, 36(3), 628–644.Google Scholar
  38. Martimort, D. (2006). An agency perspective on the costs and benefits of privatization. Journal of Regulatory Economics, 30(1), 5–44.CrossRefGoogle Scholar
  39. Nagel, T., & Rammerstorfer, M. (2008). Investment decisions under market concentration and price regulation. Working paper series, Vienna University of Economics and Business Administration.
  40. Newbery, D., & Pollitt, M. (1997). The restructuring and privatization of Britain’s CEGB—Was it worth it? Journal of Industrial Economics, 45, 269–303.CrossRefGoogle Scholar
  41. Ofgem. (2010). Handbook for implementing the RIIO model.
  42. Pollitt, M. (2004). Electricity reforms in Argentina: Lessons for developing countries. CMI Working Paper 52, Cambridge Working Papers in Economics.
  43. Reichl, J., Kollmann, A., Tichler, R., & Schneider, F. (2008). The importance of incorporating reliability of supply criteria in a regulatory system of electricity distribution: An empirical analysis for Austria. Energy Policy, 36(10), 3862–3871.CrossRefGoogle Scholar
  44. Roques, F., & Savva, N. (2009). Investment under uncertainty with price ceilings in oligopolies. Journal of Economic Dynamics & Control, 33, 507–524.CrossRefGoogle Scholar
  45. Rudnick, H., & Zolezzi, J. (2001). Electric sector deregulation and restructuring in Latin America: Lessons to be learnt and possible ways forward. IEEE Proceedings Generation, Transmission and Distribution, 148, 180–184.CrossRefGoogle Scholar
  46. Sappington, D. E. M. (2005). Regulating service quality: A survey. Journal of Regulatory Economics, 27(2), 123–154.CrossRefGoogle Scholar
  47. Sappington, D. E. M., & Stiglitz, J. (1987). Privatization, information and incentives. Journal of Policy Analysis and Management, 6, 567–582.CrossRefGoogle Scholar
  48. Spiller, Pablo T., & Vogelsang, Ingo. (1997). The institutional foundations of regulatory commitment in the UK: The case of telecommunications. Journal of Institutional and Theoretical Economics, 153(4), 607–629.Google Scholar
  49. Ter-Martirosyan, A., & Kwoka, J. (2010). Incentive regulation, service quality, and standards in U.S. electricity distribution. Journal of Regulatory Economics, 38(3), 258–273.CrossRefGoogle Scholar
  50. Trillas, F., & Montoya, M. A. (2011). Commitment and regulatory independence in practice in Latin American and Caribbean Countries. Competition & Regulation in Network Industries, 12, 27.CrossRefGoogle Scholar
  51. Volgelsang, I. (2002). Incentive regulation and competition in public utility markets: A 20-year perspective. Journal of Regulatory Economics, 22(1), 5–27.CrossRefGoogle Scholar
  52. Zhang, Y. F., Parker, D., & Kirkpatrick, C. (2005). Competition, regulation and privatisation of electricity generation in developing countries: Does the sequencing of the reforms matter? The Quarterly Review of Economics and Finance, 45(2–3), 358–379.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2017

Authors and Affiliations

  1. 1.DIGEPPolitecnico di TorinoTurinItaly

Personalised recommendations