Infrastructure Investment in Network Industries: The Role of Incentive Regulation and Regulatory Independence



set lower access prices and more liberal entry conditions in price-cap regimes than in rate-of-
return regimes (Lehman and Weisman, 2000).

We contribute to the literature in the remainder of the paper by looking at the impact of the
regulatory regime and regulatory independence on sectoral investment in selected OECD
countries. We first describe our data and our empirical model, then go on by presenting our
estimation strategy and finally present the estimation results.

4. Data issues and testable relationships

The primary interest of the empirical work lies in assessing the impact of the regulatory setup on
investment decisions in: electricity, gas and water supply; road, rail, water and air transportation;
and telecommunications. Information on the type of regulatory regime and the independence of
the sectoral regulator was derived from ad hoc surveys concerning infrastructure regulation and
investment in OECD member countries (see Annex). Regulatory regimes are divided into three
broad categories: cost-based regulation (rate of return regulation), incentive price regulation; and
no regulation (or where pricing has been deregulated).

Questionnaire responses indicate that cost-based regulation is the most popular form of regulation
(Figure 1). Out of the 15 sectors covered, nine sectors are dominated by cost-based regulation,
four sectors are mostly deregulated (electricity and gas generation, water transportation and
internet services), while incentive regulation is the most popular form of regulation in fixed line
telecommunications services. Furthermore, incentive regulation has a non-negligible role in other
seven sectors (electricity and gas transmission and distribution, road and air transportation and
fixed line networks).

12



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