Investment and revenue cap under incentive regulation: The case study of the Norwegian electricity distributors

Abstract

Electricity distribution operators are regulated as monopolies around the world. Incentive regulation is further applied to relate their allowed revenues (revenue cap) to cost efficiency and investment. Incentive regulation varies cross countries and has evolved over time for individual countries. Norway is one of the first countries reforming the network distributors by incentive regulation. Using the long time series data, we evaluated the impact of the Norwegian regulation regimes on firms’ investment. The panel data model includes common time-varying factors to control firm heterogeneity. The cross-section dependence test is further employed to test the relationship between investment and revenue cap in different regulation regimes. The empirical findings confirm a dynamic pattern of investment behavior between regimes, in terms of both the unobserved common factors and the cross-section dependence between investment and revenue cap. This study provides an interesting solution for incentive evaluation and contributes to the management accounting literature in terms of econometric techniques.