Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/90816
Authors: 
Schober, Dominik
Schäffler, Stephan
Weber, Christoph
Year of Publication: 
2014
Series/Report no.: 
ZEW Discussion Papers 14-010
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 (WACC), 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 approximately 0.2 to 3.0 percentage points depending on the size of the firm (in the range of 3% to 40% of total cost of capital). Regulation of monopolistic bottlenecks should take these risks into account to avoid implicit discrimination.
Subjects: 
Idiosyncratic/firm-specific risk
discrimination
incentive-based and quality regulation
liquidity management
size effects
electricity networks
JEL: 
G32
G33
L51
L94
Document Type: 
Working Paper

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