Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/224126 
Year of Publication: 
2020
Series/Report no.: 
Bremen Energy Working Papers No. 32
Publisher: 
Jacobs University Bremen, Bremen Energy Research (BER), Bremen
Abstract: 
This paper shows with a formal model that under monopoly regulation, OPEX-risk can be a source for a CAPEX-bias. If OPEX and CAPEX are substitutes, the regulated firm can reduce the risk of the firm and thereby reduce the true cost of capital by rebalancing OPEX and CAPEX. If the allowed rate-of-return on capital is not influenced by the firm's actions, this creates a margin between the allowed rate-ofreturn and the true cost of capital. We examine two remedies: first, fixed-OPEX-CAPEX- share (FOCS) which is a variation of TOTEX-regulation and second, OPEX-mark-up. FOCS internalizes the CAPEX-bias and can be implemented easily. The OPEX-mark-up is effective, but it will be challenging to reach the optimum.
Subjects: 
Capex-bias
Opex-risk
regulated monopoly
JEL: 
K23
L12
L51
L9
Document Type: 
Working Paper

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