An Introduction to Financial and Economic Modeling for Utility Regulators
The most effective regulators in developing countries are following remarkably similar approaches. The main common element across "best practice" countries is the use of relatively simple quantitative models of operators' behavior an...
| Main Authors: | , , , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2003/03/2191890/introduction-financial-economic-modeling-utility-regulators http://hdl.handle.net/10986/18275 |
| Summary: | The most effective regulators in
developing countries are following remarkably similar
approaches. The main common element across "best
practice" countries is the use of relatively simple
quantitative models of operators' behavior and
constraints to measure the impact of regulatory decisions on
some key financial and economic indicators of concern to the
operators, the users, and the government. The authors
provide an introduction to the design and use of these
models. They draw on lessons from international experience
in industrial and developing countries in ordinary or
extraordinary revisions and in the context of contract
renegotiations. Simplifying somewhat, these models force
regulators to recognize that, in the long run, private
operators need to at least cover their opportunity cost of
capital, including the various types of risks specific to
the country, the sector, or the projects with which they are
involved. Because these variables change over time,
scheduled revisions are needed to allow for adjustments in
the key determinants of the rate of return of the operator.
These revisions are a recognition of the fact that all these
determinants-tariffs, subsidies, quality, investments, and
other service obligations-are interrelated and jointly
determine the rate of return. At every revision, the rules
of the game for the regulator are exactly the same: to
figure out the changes in the cost of capital and to adjust
the variables driving the rate of return to ensure that it
continues to be consistent with the cost of capital. If they
can draw on reasonable data, these models do everything any
financial model would do for the day-to-day management of a
company but take a longer term view and include an explicit
identification of the key regulatory instruments. They can
monitor the consistency between cash flow generated by the
business on the one hand and debt service and operational
expense needs on the other to address the main concerns of
the operators. They can also account for a large number of
key policy factors including access and affordability
concerns for various types of consumers. They generally
account for the sensitivity of operators and users to
various regulatory design options. |
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