Regulation and investment incentives in electricity distribution: An empirical assessment

We analyze the effects of incentive regulation with revenue caps on the investment behaviors of 109 German electricity distribution companies. We hypothesize that with Germany's implementation of incentive regulation in 2009 firms increase their investments in the base year when the rate base is determined for the following regulatory period. We build a model that controls for both firm-specific heterogeneity and ownership. The results show that investments increase after 2009, especially in the base year. We find that publicly owned firms do not exhibit a different investment behavior than private firms. We conclude that a comprehensive assessment of investment decisions should include all institutional aspects of incentive regulation.