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Incentives to quality and investment: evidence from electricity distribution in Italy

Author

Listed:
  • Carlo Cambini

    (Politecnico di Torino
    EUI
    Bocconi University)

  • Elena Fumagalli

    (Bocconi University
    Politecnico di Milano)

  • Laura Rondi

    (Politecnico di Torino
    CERIS-CNR)

Abstract

This paper investigates the relationship between output-based incentives for service quality and the use of capital and non-capital resources to meet regulatory targets in the electricity industry. To conduct the empirical analysis we use a dataset collected with the support of the Italian energy regulatory authority, comprising micro data on monetary incentives and physical assets for the largest electricity distribution operator in Italy (86 % of the market). Our results show that physical assets and operational expenditures do affect service quality. Moreover, when we investigate causality in the relationship between incentives to quality and the use of capital and non-capital resources, we find that incentives Granger-cause capital expenditures (and not vice-versa). Finally, our results reveal an asymmetric effect of rewards and penalties on capital expenditures’ decisions across areas with different quality levels. From these findings, we derive several policy implications.

Suggested Citation

  • Carlo Cambini & Elena Fumagalli & Laura Rondi, 2016. "Incentives to quality and investment: evidence from electricity distribution in Italy," Journal of Regulatory Economics, Springer, vol. 49(1), pages 1-32, February.
    • Handle: RePEc:kap:regeco:v:49:y:2016:i:1:d:10.1007_s11149-015-9287-x
    DOI: 10.1007/s11149-015-9287-x
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    4. Cambini, Carlo & Congiu, Raffaele & Jamasb, Tooraj & Llorca, Manuel & Soroush, Golnoush, 2020. "Energy Systems Integration: Implications for public policy," Energy Policy, Elsevier, vol. 143(C).
    5. Ovaere, Marten, 2023. "Cost-efficiency and quality regulation of energy network utilities," Energy Economics, Elsevier, vol. 120(C).
    6. Dengjun Zhang & Jinghua Xie, 2017. "Investment and revenue cap under incentive regulation: The case study of the Norwegian electricity distributors," Cogent Economics & Finance, Taylor & Francis Journals, vol. 5(1), pages 1400900-140, January.
    7. Laura Abrardi & Cambini Carlo & Rondi Laura, 2018. "The Impact of Regulation on Utilities’ Investments: A Survey and New Evidence from the Energy Industry," De Economist, Springer, vol. 166(1), pages 41-62, March.
    8. Corton, Maria Luisa & Zimmermann, Aneliese & Phillips, Michelle Andrea, 2016. "The low cost of quality improvements in the electricity distribution sector of Brazil," Energy Policy, Elsevier, vol. 97(C), pages 485-493.
    9. Cambini, Carlo & Soroush, Golnoush, 2019. "Designing grid tariffs in the presence of distributed generation," Utilities Policy, Elsevier, vol. 61(C).
    10. Simona Galano & Luca Sessa & Simone ZuccolalÃ, 2022. "The quality of electricity supply: a comparison among Italian regions," Questioni di Economia e Finanza (Occasional Papers) 737, Bank of Italy, Economic Research and International Relations Area.
    11. Ward Romeijnders & Machiel Mulder, 2022. "Optimal WACC in tariff regulation under uncertainty," Journal of Regulatory Economics, Springer, vol. 61(2), pages 89-107, April.
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    More about this item

    Keywords

    Electricity distribution; Incentive regulation; Investment; Service quality;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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