Price Caps, Rate-of-Return Regulation, and the Cost of Capital
This Note compares the effects of price cap and rate-of-return regulation on the risk borne by regulated utilities. It present evidence that price cap regulation subjects firms to greater risks and therefore raises their cost of capital. This resul...
| Main Authors: | , |
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| Format: | Viewpoint |
| Language: | English |
| Published: |
World Bank, Washington, DC
2012
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/1997/09/694600/price-caps-rate-of-return-regulation-cost-capital http://hdl.handle.net/10986/11575 |
| Summary: | This Note compares the effects of price
cap and rate-of-return regulation on the risk borne by
regulated utilities. It present evidence that price cap
regulation subjects firms to greater risks and therefore
raises their cost of capital. This result has one clear
implication: firms regulated by price caps must be permitted
to earn higher returns. If they are not, they will be
unable to attract new investment capital and the quality of
their service will decline. |
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