Abstract
The aim of this paper is to provide deeper insights into the impact of regulatory reforms and privatization on the R&D spending of electricity utilities. Building on a novel panel data set including the biggest European utilities from eight EU countries over a period from 1985 to 2010, we find that the overall influence of the European regulatory reform process on R&D investment is ambiguous. The empirical evidence indicates that the approaching liberalization process, i.e., nearing competition, has a dampening effect on R&D spending. Utilities reduce their expenses due to increased uncertainties and additional risks. However, once the market and regulatory framework conditions have been set up and firms have become used to the new situation, higher levels of competition positively influence R&D and former incumbents invest more in order to “escape” from the competition. Moreover, we find no indication that (ownership) unbundling and incentive regulation directly affect the research expenditures of the utilities. In contrast, the privatization of utilities seems to have strong negative consequences for their amount of R&D spending.
Appendix
Appendix A: Variable Definitions
| Variable, Abbreviation | Variable Description | Source |
|---|---|---|
| R&D investment, RD | R&D investment of a firm (in thousand euros) | Datastream+annual reports |
| Sales | Sales of a firm (in thousand euros) | Datastream |
| Free cash flow, cash flow | Free cash flow=EBIT*(1–tax rate)+depreciation – change in working capital – CAPEX (in thousand euros) | Datastream |
| Leverage | Leverage=long-term debt/total assets | Datastream |
| Share in hydro power generation, share in hydro | Share in hydro power generation=hydro power capacity/total generation capacity | Platts |
| Share in nuclear power generation, share in nuclear | Share in nuclear power generation=nuclear power capacity/total generation capacity | Platts |
| C1 market concentration index, C1 | Market share of the biggest generator in a country measured in generation capacity | Platts |
| Electricity consumption, demand | Country-specific electricity consumption (in GWh) | OECD – Elec./Heat Supply and Cons. |
| Starting point of the regulatory reform process, REG | Starting point of the European regulatory reform process is the first internal energy market directive 1996/92/EC, in force since 1997; the UK and CZ differ, see Section 4.2 | EU directive 1996/92/EC |
| Firm-specific degree of public ownership, PO50 | Firm-specific degree of public ownership (0=public ownership below 50%, 1=public ownership above 50%) | Annual reports+ Internet search |
| Public ownership, PO | Ownership of the largest companies in the generation, transmission, distribution, and supply segments of the electricity industry in a country (0=private, 1=mostly private, 2=mixed, 3=mostly public, 4=public) | OECD International Regulation Database |
| Ownership unbundling, OU | Ownership unbundling of the transmission grid in a country (0=no OU, 1=OU) | EU documents+national regulatory authorities |
| Overall degree of vertical separation, OVS | Overall degree of vertical separation in a country including transmission and distribution lines (0=OVS is integrated, 1=OVS is mixed, 2=OVS is unbundled) | OECD International Regulation Database |
| Incentive regulation, IR | Introduction of incentive regulation in a country (0=no incentive regulation, 1=incentive regulation) | National regulatory authorities+Kucsera and Schmitt (2012) |
| Liberalized wholesale market, LWM | Existence of a liberalized wholesale market for electricity in a country (0=no LWM, 1=LWM) | OECD International Regulation Database |
| Third-party access, TPA | Third-party access to the electricity transmission grid in a country (0=no TPA, 1=negotiated TPA, 2=regulated TPA) | OECD International Regulation Database |
| Nearing third-party access, Nearing_TPA | Years until TPA starts (0 if neg. or reg. TPA already introduced, 1 if neg. or reg. TPA is introduced in the following year, the same for 2, 3, 4, 5 years, if the introduction of neg. or reg. TPA is in more than 5 years=5) | Self-constructed from the OECD International Regulation Database |
Appendix B: Descriptive Statistics.
| Variable | Number of Observations | Mean | Standard Deviation | Min. | Max. |
|---|---|---|---|---|---|
| RD | 256 | 69270.17 | 123,091 | 292.526 | 583,000 |
| Sales | 407 | 13,700,000 | 17,600,000 | 379,281 | 92,900,000 |
| RD/Sales | 256 | 0.0040 | 0.0049 | 0.0001 | 0.0300 |
| Cash Flow | 391 | 702,711 | 2,269,110 | –14,900,000 | 12,400,000 |
| Leverage | 408 | 0.2299 | 0.1496 | 0 | 0.6050 |
| Share in Hydro | 338 | 0.2385 | 0.1928 | 0 | 0.8019 |
| Share in Nuclear | 338 | 0.1683 | 0.1639 | 0 | 0.6022 |
| C1 | 420 | 0.3594 | 0.2315 | 0.1589 | 0.9332 |
| Demand | 500 | 289,010 | 161,838 | 37,771 | 543,248 |
| PO50 | 431 | 0.4802 | 0.5001 | 0 | 1 |
| PO | 520 | 2.0865 | 1.4632 | 0 | 4 |
| OU | 520 | 0.2519 | 0.4278 | 0 | 1 |
| OVS | 520 | 1.025 | 0.7509 | 0 | 2 |
| IR | 520 | 0.3461 | 0.4762 | 0 | 1 |
| TPA | 520 | 1.1134 | 0.8977 | 0 | 2 |
| Nearing_TPA | 520 | 1.3750 | 2.0550 | 0 | 5 |
| LWM | 520 | 0.4826 | 0.5001 | 0 | 1 |
The units of the variables correspond to the variable definitions in Appendix A.
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Article note
The authors are grateful for helpful comments from the participants in the EEM 2012 conference in Florence and the EARIE 2012 conference in Rome on former versions of this paper. Furthermore, we want to thank Gert Brunekreeft, Klaus Gugler, and Robert Weaver for their useful comments and most welcome critique. All remaining errors are ours.
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