Projects
September 2007 / December 2009

State Ownership in Regulated Industries - SORI

The provision of utilities’ services in adequate quality and quantity and at fair prices requires large amounts of investment that is both irreversible and risky. Investment in infrastructure is crucial to both prices and quantities in the long run. But...

The provision of utilities’ services in adequate quality and quantity and at fair prices requires large amounts of investment that is both irreversible and risky. Investment in infrastructure is crucial to both prices and quantities in the long run. But investment involves huge financial resources and therefore utilities firms could face the risk of financial distress if regulation fails to provide enough incentives. There is documental evidence for Europe that investment in infrastructures slowed down in the last twenty-thirty years. This delay is actually generating both welfare costs for consumers and systemic costs for the national economy since the lack or malfunctioning of infrastructures is viewed as an obstacle to economic growth. FEEM intends to investigate - both theoretically and empirically - the relationship between regulation, financing and investment decisions and how this interaction changes with utilities’ ownership (private vs. state control) structure.

Main Results and Outputs

Economic literature shows that regulatory outcomes, incentives to invest and capital structure of a regulated firm are strongly interrelated. Bortolotti, Cambini, Rondi and Spiegel (2007 and 2008) investigate the relationship between the capital structure of regulated firms, prices, and investments, and examine if and how this interaction is affected by ownership structure. We show that the interaction between capital structure decision and regulation depends on two factors: (i) the regulatory framework, i.e., whether the firms are subject to regulation by an Independent Regulatory Authority or not, and (ii) the ownership structure. We find that EU utilities tend to increase their leverage following the introduction of an Independent Authority but only if they are privately-controlled. Moreover, the leverage of privately-controlled regulated firms has a positive effect on regulated retail prices, on the firms’ market values, and on their investments.

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