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Economic Depreciation and the Regulated Firm under Competition and Technological Change

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  • Crew, Michael A
  • Kleindorfer, Paul R

Abstract

Capital recovery is increasingly important to utilities especially telephone companies when technological change and competitive entry are occurring. In the absence of efficient capital recovery policies companies are going to see their equity eroded. In addition to losses by the companies there are likely to losses to ratepayers in the form of reductions in service quality and higher rates in the future. To address the above problem this paper first reviews economic depreciation and capital recovery in the simple case of a regulated single product monopoly facing competitive entry. It employs the concept of economic depreciation to show how capital recovery policies will be front-loaded. It also develops the concept of the window of opportunity for capital recovery. There is a limited time for regulators to take remedial action, and if timely action is not taken there is no alternative but for the company to fail to recover some of its capital. These results are shown under both traditional rate of return and price caps. Copyright 1992 by Kluwer Academic Publishers

Suggested Citation

  • Crew, Michael A & Kleindorfer, Paul R, 1992. "Economic Depreciation and the Regulated Firm under Competition and Technological Change," Journal of Regulatory Economics, Springer, vol. 4(1), pages 51-61, March.
    • Handle: RePEc:kap:regeco:v:4:y:1992:i:1:p:51-61
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    Cited by:

    1. Schober, Dominik & Weber, Christoph, 2015. "Refinancing under yardstick regulation with investment cycles: The case of long-lived electricity network assets," ZEW Discussion Papers 15-065, ZEW - Leibniz Centre for European Economic Research.
    2. Simshauser, Paul & Akimov, Alexandr, 2019. "Regulated electricity networks, investment mistakes in retrospect and stranded assets under uncertainty," Energy Economics, Elsevier, vol. 81(C), pages 117-133.
    3. Gunther Friedl, 2011. "Kostenbasierte Preisregulierung, Realoptionen und Investitionsanreize," Schmalenbach Journal of Business Research, Springer, vol. 63(63), pages 136-156, January.
    4. Dominik Schober, 2013. "Refinancing under Yardstick Regulation with Investment Cycles–The Case of Long-Lived Electricity Network Assets," EWL Working Papers 1321, University of Duisburg-Essen, Chair for Management Science and Energy Economics, revised Jun 2013.
    5. Crawford, Garth, 2015. "Network depreciation and energy market disruption: Options to avoiding passing costs down the line," Economic Analysis and Policy, Elsevier, vol. 48(C), pages 163-171.
    6. Küpper, Hans-Ulrich & Pedell, Burkhard, 2016. "Which asset valuation and depreciation method should be used for regulated utilities? An analytical and simulation-based comparison," Utilities Policy, Elsevier, vol. 40(C), pages 88-103.
    7. Kaserman, David L. & Mayo, John W., 1999. "Regulatory policies toward local exchange companies under emerging competition: guardrails or speed bumps on the information highway?," Information Economics and Policy, Elsevier, vol. 11(4), pages 367-388, December.
    8. Gunther Friedl & Hans-Ulrich Küpper, 2011. "Historische Kosten oder Long Run Incremental Costs als Kostenmaßstab für die Preisgestaltung in regulierten Märkten?," Schmalenbach Journal of Business Research, Springer, vol. 63(64), pages 98-128, January.
    9. Simshauser, Paul, 2017. "Monopoly regulation, discontinuity & stranded assets," Energy Economics, Elsevier, vol. 66(C), pages 384-398.

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