Template-Type: ReDIF-Paper 1.0

Author-Name:  Cord Brockmann
Author-X-Name-First: Cord
Author-X-Name-Last: Brockmann

Title: The ratchet effect in a two lag setting and the mitigating influence of yardstick competition

Abstract: In order to increase efficiency in the provision of power distribution networks, the German
regulator Bundesnetzagentur plans to implement revenue cap regulation together
with yardstick competition.
Revenue cap regulation could bear the ratchet effect: cost minimization need not to be
optimal for the operator who anticipates that his revenue cap will become adjusted according
to his cost performance. The regulator could extract all the rent by lowering an
operator’s revenue cap to the level of costs he revealed to be possible for him to reach.
The ratchet effect could be mitigated by yardstick competition at which the level of revenues
that is allowed to one operator is tied to the performance of others that are comparable
to him. One will only be allowed to accumulate revenues that recover the least cost
level that has been adopted within the group of comparable decision makers.
In a setting of two sequential regulatory lags, this paper examines the occurence of the
ratchet effect and the mitigating influence that yardstick competition has on it.
Length:  21 pages
Creation-Date:  2007-05
File-URL: http://www.bgpe.de/texte/DP/025_brockmann.pdf
File-Format: Application/pdf
File-Function: First version, 2007
Number: 025
Classification-JEL: L51
Keywords: ratchet effect, yardstick competition, regulation
Handle: RePEc:bav:wpaper:025_brockmann