Financeability of Investments and Allocation of Costs: An Assessment of the Incentive Regulation of the Dutch High-Voltage Network

Abstract

Regulation of network tariffs is generally meant to pursue several public interests, in particular that network users should pay not more than the efficient costs while network operators should be able to finance investments. Between these objectives trade-offs exist depending on the actual characteristics of a network. This paper analyses the impact of incentive regulation on both the ability of the Dutch high-voltage network operator (TenneT TSO) to finance investments and the allocation of costs among shareholders and customers. Based on a simulation of the financial development of the network operator over 2010–2030, we conclude that the regulatory framework enables the operator to finance its investments as shareholders can be given an appropriate return on capital, provided that the operator gradually eliminates the existing inefficiencies in the network. In the mean time, customers necessarily pay more than the level of efficient costs. It appears that the allocation of costs of the current network inefficiencies among shareholders and customers depends on the regulatory choice on the time path the network operator gets to repair these inefficiencies. Eventually, regulatory choices depend on the political debate regarding diverging public interests of investments in networks versus a fair distribution of costs.