Incentive regulation with imperfect regulators
10th Conference on Applied Infrastructure Research, Berlin University of Technology, 7th et 8th October 2011
It is puzzling today to explain the diversity and the imperfection of regulation applied to the network monopolies. We argue that two sets of fundamental characteristics should be deemed when searching for the most appropriate regulatory tools to implement.
First, the endowment of the regulators set by the governments and the legislators determines their abilities (staff, budget, judicial powers) to implement any of the regulatory tools. Ranging them from the easiest to the most complex tools to implement for a regulator, there are cost plus, price/revenue cap, output regulation, menu of contracts or yardstick competition.
Besides, the regulator must take into account that the network monopolies perform multiple tasks with heterogeneous characteristics in terms of controllability, predictability and observability.
These characteristics determine the type of optimal regulatory tool to implement to regulate each network monopoly’s tasks. In particular, incentive schemes can be implemented when the criteria of controllability and predictability are satisfied. The level of observability then sets the precise regulatory tool to implement.
Some conclusions for regulatory issues of network monopolies are then derived from the study of real power regulators and the tools they implement using the above described analysis framework.
