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Agency Costs Of Third‐Party Financing And The Effects Of Regulatory Change On Utility Costs And Factor Choices

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  • Francis J. CRONIN
  • Stephen A. MOTLUK

Abstract

ABSTRACT**: Beginning in 1999, the Canadian Province of Ontario undertook restructuring and tried to implement performance based regulation for local electricity distribution utilities. Regulatory parameters were based on productivity research covering 1988–1997 that found little productivity difference by size, but wide variations in costs, factor mix, financing, and returns to capital among utilities. While some utilities questioned their ability to improve efficiency, other observers maintained many utilities were over‐capitalized, especially from third‐party financing paid by customers for connection/development charges; these observers noted that rates, profits, and valuations would be inflated. Despite its pervasive use, we can find no literature dealing with the implications of third‐party funding. We assess the effects and adjustment dynamics of regulatory and financing changes on costs, factor mix, and performance.

Suggested Citation

  • Francis J. CRONIN & Stephen A. MOTLUK, 2007. "Agency Costs Of Third‐Party Financing And The Effects Of Regulatory Change On Utility Costs And Factor Choices," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 78(4), pages 537-565, December.
    • Handle: RePEc:bla:annpce:v:78:y:2007:i:4:p:537-565
    DOI: 10.1111/j.1467-8292.2007.00346.x
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    References listed on IDEAS

    as
    1. Boyes, William J, 1976. "An Empirical Examination of the Averch-Johnson Effect," Economic Inquiry, Western Economic Association International, vol. 14(1), pages 25-35, March.
    2. Fare, R. & Grosskopf, S. & Logan, J., 1985. "The relative performance of publicly-owned and privately-owned electric utilities," Journal of Public Economics, Elsevier, vol. 26(1), pages 89-106, February.
    3. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    4. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    5. Robert M. Spann, 1974. "Rate of Return Regulation and Efficiency in Production: An Empirical Test of the Averch-Johnson Thesis," Bell Journal of Economics, The RAND Corporation, vol. 5(1), pages 38-52, Spring.
    6. Charnes, A. & Cooper, W. W. & Rhodes, E., 1978. "Measuring the efficiency of decision making units," European Journal of Operational Research, Elsevier, vol. 2(6), pages 429-444, November.
    7. repec:bla:scandj:v:94:y:1992:i:0:p:s193-205 is not listed on IDEAS
    8. David P. Baron & Robert A. Taggart Jr., 1977. "A Model of Regulation under Uncertainty and a Test of Regulatory Bias," Bell Journal of Economics, The RAND Corporation, vol. 8(1), pages 151-167, Spring.
    9. H. Craig Petersen, 1975. "An Empirical Test of Regulatory Effects," Bell Journal of Economics, The RAND Corporation, vol. 6(1), pages 111-126, Spring.
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    Cited by:

    1. Cronin, Francis J. & Motluk, Stephen, 2011. "Ten years after restructuring: Degraded distribution reliability and regulatory failure in Ontario," Utilities Policy, Elsevier, vol. 19(4), pages 235-243.

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