The Rate-of-Return Regulated Firm: Cost and Production Duality

1983 ◽  
Vol 14 (2) ◽  
pp. 405 ◽  
Author(s):  
Rolf Fare ◽  
James Logan
Keyword(s):  
Rate Of Return ◽  
Regulated Firm

scholarly journals OPEX-risk as a source of CAPEX-bias in monopoly regulation

2020 ◽  
pp. 178359172098318
Author(s):  
Gert Brunekreeft ◽  
Margarethe Rammerstorfer
Keyword(s):  
Cost Of Capital ◽  
Formal Model ◽  
Rate Of Return ◽  
True Cost ◽  
Monopoly Regulation ◽  
Return On Capital ◽  
Regulated Firm

This paper shows with a formal model that under monopoly regulation, OPEX-risk can be a source for a CAPEX-bias. If OPEX and CAPEX are substitutes, the regulated firm can reduce the risk of the firm and thereby reduce the true cost of capital by rebalancing OPEX and CAPEX. If the regulated rate-of-return on capital is not influenced by the firm’s actions, this creates a margin between the regulated rate-of-return and the true cost of capital; this causes a CAPEX-bias. We examine the so-called fixed-OPEX-CAPEX-share (FOCS), which is a variation of TOTEX-regulation, as a promising remedy to address the CAPEX-bias. We argue that FOCS is effective to address the CAPEX-bias, while it can easily be implemented.

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