Edited by Joseph E. Harrington Jr and Yannis Katsoulacos
Chapter 13: Investment and the Strategic Role of Capital Structure in Regulated Industries: Theory and Evidence
Carlo Cambini, Laura Rondi and Yossi Spiegel 13.1 INTRODUCTION In the past 30 years, many countries around the world have fundamentally reformed their public utilities sector. Among other things, these reforms included a large-scale privatization of state-owned utilities and the establishment of sector-specific Independent Regulatory Authorities (IRAs) to regulate them. In this chapter, we provide a summary and synthesis of results from an ongoing research project on the effect of privatization and the establishment of IRAs on the capital structure and investments of regulated firms and on regulated prices. In particular, we draw heavily on results from Bortolotti, Cambini, Rondi and Spiegel (2011; henceforth BCRS), Cambini and Rondi (2011, 2012) and Cambini and Spiegel (2011; henceforth CS), although we will also provide some new results on the interaction between the ownership structure of regulated utilities, their investment levels and regulatory independence. Our research is motivated in part by the fact that investments by regulated firms in infrastructure are crucial for the economy at large (see, for example, Guthrie, 2006) and account for a significant fraction of gross domestic product (GDP). For instance, in 2008, investments of public utilities in infrastructure accounted for 15.24 per cent of GDP on average in the EU 15 countries that were members of the European Union (EU) before the enlargement on 1 May 2004 (see the appendix in CS for details). Another motivation for our research is the fact that at least in the EU, the structural reforms in the public utilities sector were accompanied...
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