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Setting the regulatory allowed rate of return using simulation and loss functions – The case for standardising procedures

Lookup NU author(s): Professor Ian Dobbs

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Abstract

The level set for the allowed rate of return for a regulated firm is a critical input in many regulatory determinations. Regulators typically recognise that the welfare losses that might arise from errors in estimation of the allowed rate of return may not be symmetric, and have often tried to account for this by selecting ‘conservative’ values for some of the key input variables. This paper discusses the drawbacks of these essentially ad hoc procedures, and proposes a more systematic approach to the determination of the allowed rate of return, based on simulation and welfare loss functions. Such an approach could help promote greater consistency in making such determinations across the regulated sector.

Publication metadata

Author(s): Dobbs IM

Publication type: Article

Publication status: Published

Journal: Competition and Regulation in Network Industries

Year: 2008

Volume: 9

Issue: 3

Pages: 229-246

Print publication date: 01/01/2008

ISSN (print): 1783-5917

Publisher: Intersentia NV

URL: http://www.crninet.com/table_of_content.aspx?sy=2008&pn=3

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