The Regulation of Investment in Utilities: Concepts and Applications

This paper reviews the common approaches adopted by regulators to the inclusion and valuation of investment in the regulatory asset base and the allocation of costs of investment between different users as well as between connection and usage charges. The former set of issues are key to the creation of incentives for companies to undertake efficient least-cost investment while the latter address the key concern of how revenues are recovered (and the associated risks for the operator). By understanding these issues and how they relate to the investments that are needed in a sector, regulators have an opportunity to design regimes better able to promote necessary investment. Drawing on a worldwide series of case studies from across the regulated sectors the paper illustrates the various approaches to regulating investment and some of the practical implementation problems that are faced. This allows some tentative suggestions for the design of practical investment regimes to be developed.