Capital efficiency, its measurements and its role in regulatory reviews of utility industries: Lessons from developed and developing countries

Designing regulatory regimes that incentivise the delivery of agreed capex at as low a cost as possible has proven relatively straight-forward when it is possible to establish credible forecasts of the necessary capex and its associated cost. Greater problems arise when there is uncertainty about what capex is needed, when it may be needed and how much it will cost. Yet it is still possible to establish incentive based systems for regulating capex with some or all the characteristics that create uncertainty. This paper explores some of the issues related to incentive based regulation of capex and how flexible approaches can be developed to handle the uncertainty inherent in certain types of capex. Examples of incentive based systems are also provided.