Incentive Regulation, Investments and Technological Change

Based on an idiosyncratic reading of the literature I propose intermediate (rather than tight or soft) regulation for balancing investment incentives with allocative efficiency and competition objectives. Intermediate regulation is compatible with incentive regulation and helps lengthening the regulatory commitment period necessary for incentives. However, such commitment for the whole time horizon of infrastructure or innovation investments is impossible. The compatibility of incentive regulation and efficient investment is thus in doubt. Incentive regulation for regular infrastructure investments therefore needs periodic updating based on rate-of-return regulation criteria. Innovative infrastructure investments may warrant regulatory holidays, which should be conditioned on strict criteria.

Optimal Price Regulation for Natural and Legal Monopolies

Optimal price regulation for natural and legal monopolies is an impossible task. The still difficult .task of good price regulation can be systematized by considering separately price level and price structure of the regulated firm. Various methods of price level and price structure regulation are evaluated and then considered for the regulation of electricity transmission, both in the context of an independent transmission company and of vertical integration between transmission and most of the generation capacity. The regulatory approach suggested uses price caps defined on two-part tariffs. This way, flexibility for short-term capacity utilization can be combined with incentives for investments in new transmission capacity.

Electricity Transmission Pricing and Performance-Based Regulation

Performance-based regulation (PBR) is influenced by the Bayesian and non-Bayesian incentive mechanisms. While Bayesian incentives are impractical, the insights from their properties can be combined with practical non-Bayesian mechanisms for application to transmission pricing. This combination suggests an approach based on the distinction between ultra-short, short and long periods. Ultra-short periods are marked by real-time pricing of point-to-point transmission services. Pricing in short periods involves fixed fees and adjustments via price-cap formulas or profit sharing. Productivity-enhancing incentives have to be tempered by long-term commitment considerations, so that profit sharing may dominate pure price caps. Investment incentives require long-term adjustments based on rate-of-return regulation with a “used and useful” criterion.

Access and Interconnection Pricing Issues in Telecommunications

Telekommunikation, Regulierung, Preis, Telecommunications, Regulation, Price

Network Utilities in the U.S. - Sector Reforms without Privatization

U.S. network industry reforms led other countries in the past, but have recently run into difficulties in specific areas. In particular, the U.S. telecommunications sector was hit by a deep crisis and electricity reforms suffered under the California disaster. Part of the explanation for these difficulties stems from past successful liberalization and deregulation experiences in other areas suggesting that competition could provide large benefits to hitherto regulated utilities in local telephony and the electricity sector. Part of the explanation lies in an underestimate of the coordination problems, resulting in bad institutional design, and in the difficulty to deal with vested consumer interests.network industries, regulation, competition, telecoms, electricity

Coal markets and hierarchies

Errata sheet inserted.In "Markets and Hierarchies" (1975) Oliver Williamson has developed a heuristic framework (Organization Failures Framework = OFF) to attack the issue of institutional borderlines between markets and firms. Below we discuss this concept and apply it to local coal markets. Differences in larger domestic and international coal markets then cast some doubts on the practical usefulness of the approach

Regulation of Access to the Telecommunications Network of New Zealand: A Review of the Literature

The rapid widespread technological change and concomitant deregulation of network industries has engendered a burgeoning demand for connection between technologically like as well as technologically unlike networks. The processes by which contracts are reached and the nature of these contracts is important for the performance of these industries.This is a review of the state of the economic literature about interconnection. While its focus is on telecommunications the principles it reviews are more or less relevant to other networks depending upon their particular characteristics. The review considers only the pricing element of an interconnection contract leaving other issues such as risk sharing transactions costs and technological agreement aside. It does not consider the direct or political economy costs of regulation. Even so it reveals that the pricing issues have not been solved.It is apparent from the review that interconnection pricing can only be appraised in the wider context of the regulation and competition of the market as a whole. For example the properties of the now-famous Baumol-Willig (ECPR) rule are different when there is a retail price cap than without it. It is critical for the special treatment of interconnection contracts that there are natural monopoly elements in the network. Where these are absent or bypass is economically viable interconnection contracts will generally not pose special competition concerns.The survey reviews the conceptual basis of proposed regulatory schema andmeasurement issues that arise in their use. In particular it considers various price-cap mechanisms. It does not systematically review the literature on industry and regulatory performance under the different regulatory regimes.Where there are natural monopoly elements the review suggests that for one-way access the two leading approaches to regulation appear to be price caps or access price caps combined with deregulated retail tariffs. These approaches would include a form of the Baumol-Willig rule. The review emphasises that two-way access is characterised by both potential exclusion and potential collusion. It suggests that a regulatory approach would seek to concentrate on keeping access charges low. Lighthanded regulation would then come in the form of deregulated retail tariffs. Taken together this suggests that in a system with both one-way and two-way access theremight be access price caps possibly with two baskets one for one-way access and one for two-way access charges. At the same time retail would be deregulated. In New Zealand the regulatory price cap has been on household access.The literature surveyed on private negotiations is quite thin. It suggests that where regulators can step in as backups if private negotiations fail it would allow regulators to concentrate on contentious issues while the "technical" issues would be resolved privately. In such circumstances regulatory determination can become the common mechanism by default