RETURN REQUIREMENTS FOR REGULATED ENTITIES IN THE GAS INDUSTRY

In regulated businesses, utility companies are facing asymmetric risks due to ex-ante regulation. Shareholders have to question whether their business is earning appropriate returns taking into account those asymmetric risks involved. Adequate performance measures need to be designed and installed in order to benchmark the regulated business against alternative investments. In our study we analyse the impact of regulation on the process of steering and more precisely on the definition of return requirements in the case of a Central and Eastern Europe gas industry with permanent ex-ante regulation. For this purpose, we examine the absolute return target by its two inputs, the rate of return and the investment basis. We conduct an Analytic Hierarchy Process in order to assess the options for the investment basis used to calculate an absolute return requirement in a structured way. Our findings show a twofold view on return requirements in terms of the time horizon. In short-term, regulatory parameters should be taken into account. However, in long-term those parameters can only serve as a figure to control whether regulatory conditions fulfil the needs of the shareholders. Our study shall contribute to the static analysis of regulation on return requirements and steering in the gas industry after privatization.