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Regulation Body of Knowledge
http://regulationbodyofknowledge.org/[17/01/13 9:17:29 PM]
TRANSLATED GLOSSARIESRENEWABLE ENERGY AND ENERGYEFFICIENCY
REGULATION OF STATE-OWNEDENTERPRISES
TRANSPORTATION
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Translated Glossaries
http://regulationbodyofknowledge.org/new-translated-glossaries/[17/01/13 9:18:08 PM]
The glossary of the Body of Knowledge on Infrastructure Regulation has been translated from English into Chinese, French, Italian,
Japanese, Portuguese, Spanish, and Thai. An Arabic translation and a Russian translation are in progress.
We, the authors of this web site, are certain the translations of the BoKIR glossary into these languages strengthen the value of the
BoKIR as an international online resource. We expect it should prove useful for improving competencies of local decision-makers and
policy analysts in infrastructure industries around the world, in terms of operations management and regulation. Instructors in higher
education, and those who manage organizational capacity-building should also find these translations valuable.
If your organization would like to sponsor a new translation of the glossary, please contact PURC at [email protected].
Translated Glossaries
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Renewable Energy and Energy Efficiency
http://regulationbodyofknowledge.org/renewable-energy-and-energy-efficiency/[17/01/13 9:18:51 PM]
The BoKIR has added material on the involvement and mandate of the energy regulator with regards to rules affecting Renewable
Energy (RE) and Energy Efficiency (EE). The renewable technologies include solar, wind, geothermal, biomass, and hydropower.
The RE policies include Feed-in Tariffs, Net Metering, Renewable Portfolio Standards, Auctions, Power purchase agreements,
direct investment support, and other incentives for RE development (resource mapping and encouraging NGO involvement). The
policies are not mutually exclusive. Also, EE can be promoted via utility actions (incentivized by the regulator and actions by other
agencies). The former include reduced line losses, improvements in load patterns and system reliability, decision-relevant customer
billing information, energy audits, and smart grids. The latter include setting appliance standards, providing government financial
support, creating tradable certificates, awarding tenders, and establishing government programs like improving EE in schools and
hospitals. First, we start with the mandate of the energy regulator in promoting RE and the main challenges faced by the agency.
Regulatory functions determine how specific policies affect incentives affecting investments in RE technologies.
New Frequently Asked Questions:
What should be the involvement and mandate of the energy regulator in connection with promotion of Renewable Energy and what are the main challenges
associated from a regulatory perspective?
What should be the involvement and mandate of the energy regulator in connection with promotion of Energy Efficiency and what are the main challenges associated
from a regulatory perspective?
What is the best choice of regulatory instruments/tools for Renewable Energy promotion based on efficiency and effectiveness of reaching policy targets? (FiT versus
Green Certificates versus Central Procurement and others)
What is the best choice of regulatory instruments/tools for Energy Efficiency promotion based on efficiency and effectiveness of reaching policy targets? (Energy
Efficiency Certificates versus Central Procurement and others)
Readers will see that the responses focus on what sector regulators can do, not what nations “should do.” The FAQs are not meant to be comprehensive tutorials on the
issues but to serve as maps that can guide regulators and infrastructure managers to more detailed material.
The issues surrounding access to electricity and approaches to more sustainable and environmentally-friendly energy sources are complex. Stakeholders have a wide
range of views on the cost-effectiveness of different technologies and the extent to which alternative energy should be promoted in the developing world. The purpose of
the new FAQs will be to outline the key issues for those agencies implementing public policy towards renewable energy and energy efficiency. Additional cases and
information on laws are be available online at PPP in Infrastructure Resource Center for Contracts, Laws, and Regulation (PPPIRC) and Private Participation in
Infrastructure Database.
Renewable Energy and Energy Efficiency
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Regulation of State-Owned Enterprises
http://regulationbodyofknowledge.org/regulation-state-owned-enterprises/[17/01/13 9:19:27 PM]
Regulating State-Owned Enterprises (SOEs) raises a unique set of issues for a infrastructure regulator: a state organization (which
is often relatively new) is attempting to regulate another (very established) state organization that has strong links to politically
powerful stakeholders.
There is no simple recipe for regulators: the laws, traditions, and historical performance by the SOE differ widely. Economic
incentives used by regulators work differently on private and public companies: this observation affects regulatory policies. Important
steps for improving sector performance include seeking insulation from politics, communicating clear priorities, collecting financial and
operating data, incentivizing cost-containment and quality improvements, promoting good governance (including transparency),
evaluating network expansion, and monitoring utility performance. The cases and lessons in these FAQs should help decision-makers address emerging issues.
If your organization would like to sponsor the addition of new infrastructure content to this web site, please contact PURC at purcadmin @ warrington.ufl.edu.
Regulation of State-Owned Enterprises
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Transportation
http://regulationbodyofknowledge.org/transportation/[17/01/13 9:20:15 PM]
Transportation content was the first major addition to the site since launching the BoKIR.
The national case studies and other resources related to rail, bus, and intra-urban transport are diverse, since approaches to
transportation regulation differ widely across countries. The expansion of the infrastructure sectors covered in the narrative was
necessitated by a growing recognition that there were lessons that could be shared across countries and regions of the world. As
another network industry, transportation required expansion and updates for each topic area (especially in market
structure/competition policy, price level regulation, and regulatory process).
If your organization would like to sponsor the addition of new infrastructure content to this web site, please contact PURC at
purcadmin @ warrington.ufl.edu.
Transportation
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Foundations of Regulation
http://regulationbodyofknowledge.org/general-concepts/[17/01/13 9:20:54 PM]
Utility Market Reforms
Development of Regulation
Market Structure and
Performance
Regulating Public vs. Private
Operators
Theories of Regulation
Concluding Observations
Related FAQs
Annotated Reading List
Rationale for Regulation,
Including Regulation of
Monopolies and Oversight
of Competitive Markets,
Public Interest Theory,
Interest Group Theory, and
the Difference Between
Normative and Positive
Theories of Regulation.
Rationale for Reform of
Utility Markets (e.g. Fiscal
Constraints, Technological
Change, Policy Innovations,
Incentives for Efficiency)
and the Elements of Market
Reform, Including Private
Participation, Liberalization,
and Regulation.
Common Roles of
Regulators
Regulatory Objectives and
Priorities, Including Trade-
Offs in Objectives and
Achieving Balance in
Pursuing Objectives
Regulation of Market
Structure vs. Regulation of
As the Overview explains, utility regulation can occur for several reasons. Common arguments in favor of
regulation include the desire to control market power, facilitate competition, promote investment or system
expansion, or stabilize markets. In general, though, regulation occurs when the government believes that the
operator, left to his own devices, would behave in a way that is contrary to the government’s objectives.1 In
some countries an early solution to this perceived problem was government provision of the utility service.
However, this approach raised its own problems. Some governments used the state-provided utility services to
pursue political agendas, as a source of cash flow for funding other government activities, or as a means of
obtaining hard currency. These and other consequences of state provision of utility services often resulted in
inefficiency and poor service quality. As a result, governments began to seek other solutions, namely regulation
and providing services on a commercial basis, often through private participation.
This chapter on General Concepts in utility regulation covers general themes in utility regulation. It is organized
as follows. The following paragraphs describe recent utility market reforms, the development of utility regulation,
market structure and how it relates to sector performance, and theories of regulation. References are organized
by topic.
1. Recall that there is also a concern about the government’s objectives. This concern implies a need for
regulatory processes that enforce commitments, ensure that long term efficiency is not sacrificed for short
term political expediency, and treat all stakeholders fairly.
Foundations of RegulationIntroduction
Footnotes
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Foundations of Regulation
http://regulationbodyofknowledge.org/general-concepts/[17/01/13 9:20:54 PM]
Conduct
Regulation of Public vs.
Private Companies, of
Existing vs. New Firms
Options and Critiques for
Private Participation In
Infrastructure
Regulatory Instruments
(Primary and Secondary
Legislation, Licenses,
Concessions)
Informational Asymmetry,
Limits to Regulation, and
Implications for Using
Incentives Versus
Command and Control
Law and Economics
Market Structure and Competition
http://regulationbodyofknowledge.org/market-structure-and-competition/[17/01/13 9:21:31 PM]
Monopoly and Market Power
Competition in Utility Markets
Competition for the Market
Concluding Observations
Related FAQs
Annotated Reading List
Monopoly and Market
Power
Competition in
Infrastructure Markets
Competition for the Market
As explained in the Overview, basic problems addressed by regulation include the control of market power and
an asymmetry between the government and the operator with respect to objectives and information. It is also
noted that there are three basic approaches to dealing with these problems, (a) subjecting the operator to
competitive pressures, (b) gathering information on the operator and the market, and (c) applying incentive
regulation.1 Regulators typically use some combination of these three approaches and the proper mix depends
on the country’s needs and objectives, institutional capabilities and arrangements, cost of obtaining information,
and potential for competition.
This chapter examines issues of subjecting the operator to competitive pressure. Competition is useful because
it reveals actual customer demand and induces the operator to provide service quality levels and price levels
that customers want, subject to the operator’s financial need to cover its costs. In other words, competition can
align the operator’s interests with the customers’ interests and can cause the operator to reveal his true costs
and other private information.
The remainder of this chapter is organized as follows. Monopoly and market power are examined first,
explaining factors that give rise to monopoly and market power, and the effects of these market structures.
Market structure refers to the number of firms involved in supplying a market and the relationships among those
firms. Competition in the market, which is the traditional view of competition, is covered next. Facilitating
competition, structuring a utility industry for competition, assessing market competition, and issues of
competition for the market are then reviewed. Competition for the market is an approach used when it is
impractical or inefficient to have more than one operator serve a market. Issues examined include auctions,
bidding, and contracting. Chapter IV considers competition between markets. Following this chapter’s narrative
is a list of references that is organized by topic.
1. See sections on Financial Analysis, Price Level Regulation, and Quality, Social, Environmental for
information on incentives and information.
Market Structure and CompetitionIntroduction
Footnotes
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Financial Analysis
http://regulationbodyofknowledge.org/financial-analysis/[17/01/13 9:22:08 PM]
Information in the Regulatory
Process
Regulation of Financial
Statements
Comparative Analyses
Earnings Measurement
Cost of Capital
Business Decision Making and
Its Financial Effects
Information Management
Concluding Observations
Related FAQs
Annotated Reading List
Financial Analysis
Identifying Informational
Requirements
Basic Financial Statements
Regulatory Systems of
Accounts
Ring Fencing and Control of
Cross-Subsidization
Earnings Measurement
Determination of Cost of
Capital (Debt and Equity),
Including With Scarce or
Unreliable Cost Information
Financing and Risk
Mitigation
Data Sources
Systems for Obtaining and
Managing Information
Measures to Improve Data
Quality
Systems for Reporting
Information and Public
Recall that a basic problem addressed by regulation is an asymmetry between the government and the
operator with respect to objectives and information.1 Gathering information on the operator and the market and
applying incentive regulation, noted elsewhere, are two basic methods for dealing with these asymmetries, and
that information gathering is generally an integral part of incentive regulation.2 The focus of this section is
gathering and analyzing financial information and operating information.3 Regulators use information for
monitoring operator investments, studying operator financial performance, and performing incentive regulation,
which is used primarily to regulate the overall price level of the operator. Financial analysis assists the regulator
in performing incentive regulation by providing the regulator with information on how various price levels affect
the operator’s ability to obtain capital for investment. The remainder of this section is organized as follows. First
is an explanation of the role of information in the regulatory process and various ways that regulators use
information. Then the focus turns to the basic financial data found in financial statements, which are the
fundamental reports that regulators use to monitor investments, study financial performance, and perform
incentive regulation. Rules that regulators impose on operators to ensure that the financial statements are useful
for regulators are described next, and then financial analysis is reviewed. The chapter then turns to describe
how regulators use this financial information to determine whether the operator’s earnings on the regulated
operations are sufficient to attract capital for future investments, including techniques for estimating the cost of
capital.4 What follows is a look at net present value (NPV) analysis that operators use to make investment
decisions and that regulators use (along with other analyses) to value cash flows. Finally, the chapter concludes
with an examination of other informational requirements, obtaining and managing information, data quality,
reporting information, and public access to information. Following this section’s narrative is a list of references,
organized by topic.5
1. Rationale for Regulation in Foundations of Regulation covers information asymmetries.
2. See Price Level Regulation for information on incentive regulation.
3. Obtaining and managing information is covered in Financial Analysis. The immediate chapter examines
using financial information.
4. Because financial analysis is central to some of the regulator’s key functions, such as regulating prices,
the regulatory processes that the regulator uses when conducting financial analyses affect operator
performance and how stakeholders view the regulator. Issues in Regulating the Price Level and Regulatory
Process note these regulatory processes
5. Arguably topics such as financial statements, uniform system of accounts, and cost of capital are not part
of financial analysis, but they are noted here because they are intimately associated with financial analysis.
Financial AnalysisIntroduction
Footnotes
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Financial Analysis
http://regulationbodyofknowledge.org/financial-analysis/[17/01/13 9:22:08 PM]
Access to Information
Price Level Regulation
http://regulationbodyofknowledge.org/price-level-regulation/[17/01/13 9:23:06 PM]
Basic Forms of Regulation
Incentive Features and Other
Properties
Features of Price Cap and
Revenue Cap Regulation
Earnings Sharing
Issues In Regulating the Price
Level
Properties of Benchmarking
and Yardstick Analyses
Conducting A Price Review
Concluding Observations
Related FAQs
Annotated Reading List
Principles
Price Regulation
Revenue Caps
Principles of Using
Efficiency Measures for
Yardstick Regulation
Earnings and Revenue
Sharing Techniques
It is time to address incentive regulation, which is the third instrument that regulators use to control market
power and address the asymmetry between the government and the operator with respect to objectives and
information. In many instances this topic is intertwined with financial analysis, which is the subject of Financial
Analysis.
Incentives can be used in several contexts. For example, policymakers in the United States used a quid pro quo
incentive when some of the U.S. incumbent local telephone companies were allowed to enter long distance
markets only if they first cooperated in opening their local markets to competition. This chapter focuses on
incentives related to the regulation of the overall price level of the service provider. First, the basic forms of
regulation used to regulate price levels are addressed. Then the underlying principles of incentive regulation are
explained, and how each form of regulation addresses those principles is summarized. How each form of
regulation is implemented and the issues that regulators face is reviewed, followed by describing the regulatory
processes used to review overall price levels. Following this section’s narrative is a list of case studies and lists
of references. References are organized by topic.
Price Level RegulationIntroduction
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Tariff Design
http://regulationbodyofknowledge.org/tariff-design/[17/01/13 9:24:23 PM]
Economics of Tariff Design
Government and Operator
Objectives
Deviations from Marginal
Cost Pricing: Ramsey
Pricing
Deviations from Marginal
Cost Pricing: Multipart
Pricing
Price Discrimination
Optional Tariffs
Non-linear Prices
Peak Load Pricing
Summary
Pricing for the Poor
Pricing in Competitive or
Partially Competitive
Environments
Demand Forecasting
Concluding Observations
Related FAQs
Annotated Reading List
Principles, Options and
Considerations in Rate
Design, Including
Conditions for Deciding
When Tariff Design is a
Regulatory Concern
Economics of Alternative
Price Structures (Linear and
Non-Linear Rates, Peak-
Load Pricing, Multi-Part
Tariff, Price Discrimination,
etc.)
Pricing for the Poor
Tariff design or rate design refers to the relationships among the individual prices the operator charges.1 Tariff
design is different from most other regulatory issues in that it is one topic area where the interests of the
operator and the interests of the government often coincide. This section describes situations where this is likely
to hold so that the government can do no better than to permit the operator to choose its own tariff design. Also
noted are situations where regulation of tariff design might be desirable. Various tariff design options and their
properties are then examined, followed by pricing for the poor,2 pricing in competitive situations,3 and demand
forecasting.4 Following this section’s narrative is a list of references, organized by topic.
1. The section on Price Level Regulation examines how to set the overall price level.
2. The reference section on Revenue Caps also covers issues of service to the poor.
3. The reference section regarding Approaches to Competition examines other issues related to competition
in the market.
4. The reference section for Basic Financial Statements also examines issues related to demand forecasting.
Tariff DesignIntroduction
Footnotes
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Tariff Design
http://regulationbodyofknowledge.org/tariff-design/[17/01/13 9:24:23 PM]
Effect of Joint and Common
Costs Associated With
Network Industries on
Pricing Rules
Effect of Competition on
Decisions Regarding Tariff
Rebalancing, Cross-
Subsidization, and Funding
of Social Obligations
Demand Forecasting
Quality, Social, Environmental Issues
http://regulationbodyofknowledge.org/quality-social-environmental/[17/01/13 9:25:11 PM]
Quality of Service
Environmental and Safety
Issues
Social Aspects
Concluding Observations
Related FAQs
Annotated Reading List
Quality of Service
Environmental and Safety
Issues
Social Aspects
Regulators often focus on issues of price, incentives, and market structure.1 However, issues of service quality,
achieving social objectives, and the environment – sometimes collectively called non-price issues – also receive
considerable attention. As in the case of tariff design, there are instances in service quality, social, and
environmental issues in which the interests of the operator and the interests of the government may coincide.
An example is the case of prepaid cards for mobile service in telecommunications described in Tariff Design.
Telecommunications operators developed these cards without government direction and many among the poor
are now able to have phone service as a result of these cards.
Situations, however, where the interests of the government differ from the interests of the operator.2 For
example, if the customers at the margin – i.e., the customers who are most indifferent about whether or not to
purchase the service – are not very responsive relative to other customers to changes in service quality, then
the operator has an incentive to under invest in quality. Furthermore, it may be difficult for customers to
ascertain quality before making their consumption decision or to adjust their purchasing if quality is poor. In
these situations the pricing mechanism does not provide the operator with an incentive to invest in the
appropriate amount of quality.
Also, if the environmental impact of the utility service is an externality, then a profit-maximizing operator would
under invest in environmental protection. An externality is an effect that is visited on someone who is not a party
to the transaction. For example, if producing electricity causes air pollution, people who are not purchasing the
electricity may suffer from the air pollution. Absent government intervention or some other extra-market effort,
this pollution effect does not affect the operator’s profits, so the operator does not make production decisions
that are beneficial from a welfare perspective.
When the interests of the operator and the interests of the government do not coincide, the government may
find it optimal to establish incentives for the operator to pursue the government’s goals with respect to service
quality, social issues, and the environment. These issues are considered in this section, as are service quality
issues, environmental issues, and finally social issues. Following this section’s narrative is a list of references,
organized by topic.
1. Pricing, incentive regulation, and market structure are covered in Chapters Tariff Design, Price Level
Regulation, and Market Structure and Competition respectively.
2. See General Concepts for a discussion of the importance of asymmetries between the operator and the
government.
Quality, Social, Environmental IssuesIntroduction
Footnotes
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Quality, Social, Environmental Issues
http://regulationbodyofknowledge.org/quality-social-environmental/[17/01/13 9:25:11 PM]
Regulatory Process
http://regulationbodyofknowledge.org/regulatory-process/[17/01/13 9:25:47 PM]
Institutional Design
Reviews and Appeals of
Regulatory Decisions
Ethics
Stakeholder Relations
Concluding Observations
Related FAQs
Annotated Reading List
Institutional Design Issues
Development, Review, and
Appeal of Regulatory Rules
and Decisions
Ethics
Stakeholder Relations
Recall that a basic problem of regulation is to overcome to the extent possible the asymmetries between the
government and the operator.1 Even if regulatory instruments overcome this asymmetry, it is still important to
ensure that the actions of the government and the regulator match the long-term interests of the country’s
citizens. It may be tempting, for example, for politicians to pressure the regulator to pursue short-term political
interests that hurt the longer-term interests of customers of the utility services.2 To overcome such problems to
the extent possible, countries adopt rules for regulation and government institutions that encourage regulation
under the law,3 as well as independence, transparency, predictability, legitimacy, and credibility of the regulatory
system, to help ensure that regulation serves the long-term interests of the country.
This section addresses these issues. First, it examines institutional design issues, such as the role of the
regulator, followed by a review of regulatory decisions, ethics and stakeholder relations are described. Following
this section’s narrative is a list of references, organized by topic.
1. See Foundations of Regulation.
2. This highlights what are in essence two principal-agent problems, one between the government (acting as
the principal) and the regulator (acting as the agent) and another between the public (acting as the principal)
and the government (acting as the agent).
3. See Foundations of Regulation’s reference section on Rationale for Regulation for information about the
economic foundations of law.
Regulatory ProcessIntroduction
Footnotes
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
About
http://regulationbodyofknowledge.org/about/[17/01/13 9:26:21 PM]
Developed by the Public Utility Research Center (PURC) at the University of Florida, in collaboration with
the University of Toulouse, the Pontificia Universidad Catolica, the World Bank and a panel of international
experts, the Body of Knowledge on Infrastructure Regulation (BoKIR) summarizes some of the best thinking on
infrastructure policy. Funding for this project came from the Public-Private Infrastructure Advisory Facility
(PPIAF).
This site provides links to more than 500 references, an extensive glossary and self-testing features to facilitate
learning. The references include publications and decisions by regulatory agencies and other governmental
bodies; policy advisories by think tanks, consultants, donor agencies, and others; and research by academics,
consultants, and other experts.
The World Bank staff, academics, regulators, government officials and consultants who worked on the BoKIR
hope that it provides a standard set of regulatory concepts and readings to which regulators throughout the
world should be exposed, thus affording them opportunities for shared knowledge across countries and sectors,
and for improved regulatory practices.
We thank the following people who served as advisors and facilitators during the development of this web site.
These experts provided strategic direction, suggested references, edited text, and made numerous other
recommendations. The authors are responsible for any errors and omissions.
PPIAF established a Governing Board, a Review Committee, and a Secretariat at PURC to manage the Body of
Knowledge on Infrastructure Regulation web site.
Berg, Sanford V. Director of Water Studies, Public Utility Research Center at the University of Florida
Izaguirre, Karina, Infrastructure Specialist, The World Bank
Jamison, Mark A. Director, Public Utility Research Center at the University of Florida
Abou-Nehme, Bassem, Energy Finance Specialist, The World Bank
Gallo, Joshua, Infrastructure Specialist, The World Bank
Gassner, Katharina, Senior Economist, The World Bank
We also thank the following individuals for their hard work on the redesign and September 2012 launch of this
web site:
Rossana Passaniti, Joey Spooner, Kt Stemper, Rayven Gentry and Chris Sposito.
About
Current Governing Board Members:
Former Governing Board Members:
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Introduction
http://regulationbodyofknowledge.org/introduction/[17/01/13 9:26:57 PM]
Structure
Length and Relative Importance of Chapters
Conclusion
Notes on References
Structure
Length and Relative
Importance of Chapters
Conclusion
Notes on References
Reforms in infrastructure sectors since the 1980s have resulted in major growth in the number of regulatory
agencies around the world. The success and sustainability of reforms in these sectors will in large part depend
upon the professionalism of these agencies, and the quality of the work that they undertake. Donor agencies
such as the World Bank, the Inter-American Development Bank, USAID and others, have funded capacity
building programs for agencies in developing countries, covering consulting advice, training, development of
centers of research into regulatory economics, and efforts to build regional networks of regulators and
practitioners in these areas, such as SAFIR and AFUR. Training efforts for newly formed regulatory agencies
have been extensive. Regulatory professionals around the world have attended the training program developed
jointly between the University of Florida Public Utility Research Center (PURC) and The World Bank. Other
courses have also made substantial contributions. For example, the SAFIR course has instructed several
hundred participants. The Energy Regulators Regional Association (ERRA) in Eastern Europe offers a variety of
successful courses on regulatory topics.
The programs of training, technical assistance and capacity building have provided relevant and timely expertise
and information to regulatory agencies. However, there has been no internationally recognized measure of the
expertise and professional competence of professionals working in regulatory agencies and no standard body of
knowledge on infrastructure regulation (BoKIR) to serve as guides for capacity building and professional
development. The lack of a standard BoKIR and no obvious means by which it could be updated make it
difficult to develop consistency for long-term institutional learning, to share knowledge across countries and
across sectors, and to establish stable and dependable regulatory practices.
The purpose of this document is to identify such a standard BoKIR on infrastructure regulation, including both
transportation and utilities. In developing this document, the authors have focused on basic principles and best
practices that have developed during many years of regulation in some developed countries, and more recently
across the rest of the world. The BoKIR includes case studies to illustrate how regulators make and implement
decisions in practice, and to illustrate that country context matters. The authors do not claim to have identified
knowledge that is settled and will remain unchanged, nor best practices that all or even most countries should
adopt. Regulation is a dynamic process, so practitioners and scholars are continually learning and adapting to
new situations. Countries vary in their stages of development, priorities, histories, and institutional capabilities to
name a few, so that best practice for one country may not be best practice for another. In recognition of these
dynamics and this diversity in regulation, literature that reflects new thinking, analysis, and opposing points of
view are included in the BoKIR. The authors also suggest that this document should be continually updated and
augmented as new ideas emerge and new knowledge is gained.
Introduction Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Introduction
http://regulationbodyofknowledge.org/introduction/[17/01/13 9:26:57 PM]
Overview
http://regulationbodyofknowledge.org/overview/[17/01/13 9:27:33 PM]
The Regulatory Problem
First Approach: Competition
Competition in the Market
Competition for the Market
Second Approach: Knowledge
Third Approach: Incentive
Regulation
Basic Approaches to
Incentive Regulation
Financial Analysis
Ring Fencing and
Accounting Separations
Benchmarking or Yardstick
Regulation
Tariff Design
Service Quality,
Environmental, and Universal
Access/Service Issues
Regulatory Process
Institutional Arrangements
Review and Appeal
Ethical Conduct
Stakeholder Relations
Concluding Observations
There is a growing consensus that the successful development of infrastructure – electricity, natural gas,
telecommunications, water, and transportation – depends in no small part on the adoption of appropriate public
policies and the effective implementation of these policies. Central to these policies is development of a
regulatory apparatus that provides stability, protects consumers from the abuse of market power, guards
consumers and operators against political opportunism, and provides incentives for service providers to operate
efficiently and make the needed investments.
Because the way regulation is implemented plays such a vital role in infrastructure development and use, most
discussions of infrastructure policy focus on how regulation should be done: for example, how to introduce and
facilitate competition, how to provide operators with incentives for improved performance, and how regulators
should involve stakeholders. The academic literature calls such work normative theories of regulation, but the
authors will simply refer to this as normative work.
Normative work is the primary focus of this Overview and the following chapters. The “primary” focus is on
normative work because the authors would be in error if they failed to recognize why regulation occurs. For
example, there is always a political context within which a country chooses to initiate, continue, or change its
regulation of infrastructure. The motivations for regulation affect how regulation occurs and are considered by a
second basic school of thought on regulatory policy, namely, positive theories of regulation.
Positive theories focus on the roles of stakeholders in the policy-making process, the results of their advocacy
of solutions that address their individual interests, and broader motivations, such as political interests and the
public interest.1
The purpose of this Overview is to provide a broad description of the motivations for regulation and the issues
that regulation addresses.2 It begins by describing the regulatory problem, which includes issues of market
power, opportunism, and asymmetric information. Then the basic approaches of regulation for dealing with
these issues are described. Market structure, which examines monopoly power and competition is covered first.
Then financial analysis, which regulators use to ensure financial viability, oversee system development and
expansion, and protect against excessive price levels is covered. Regulating the overall price level is considered
next, followed by issues of rate design. Finally non-price issues, such as service quality, environmental impacts,
and social issues, are reviewed, as is the regulatory process, including the management of information.
The remainder of this Overview is organized as follows. The Regulatory Problem defines the regulatory problem
from different perspectives and identifies the basic approaches for overcoming the market power and information
issues that tend to underlie many regulatory policies. First Approach: Competition describes the first approach,
namely the use of competition. Second Approach summarizes the second approach, which is the gathering and
use of information on markets and operators. Third Approach: Incentive Regulation examines the last approach,
the use of incentive regulation. The remaining sections examine related issues. Tariff Design describes issues in
tariff design. Service Quality, Environmental, and Universal Access/Service Issues covers service quality,
environmental, and social issues. Regulatory Process examines the regulatory process. Concluding
Observations provides concluding observations.
Overview Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
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1. Rationale for Regulation, the first reference section of General Concepts examines theories of regulation
and the rationale for regulation. The section on Regulatory Process of this Overview and Quality, Social,
Environmental factors that follow specifically examine how regulators can address this political context of
regulation.
2. In this Overview, the authors generally refer to the “government” when referring to the development of
policies, and to the “regulator” or “agency” when referring the implementation of policy. The authors
recognize that the institutional arrangements for developing and performing regulation vary across countries.
For example, in some countries, regulatory agencies take initiative in opening markets to competition, while
in other countries all such work is done within a ministry. However, it is too cumbersome to try to reflect all
possible divisions of responsibilities for regulatory policy in this narrative, so language is simplified here.
Footnotes
Glossary
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Frequently Asked Questions -> Frequently Asked Questions
Renewable Energy and Energy Efficiency
Regulatory Process
Social Pricing and Rural Issues
State-Owned Enterprises
Telecommunication Regulation – Interconnection
Foundations of Regulation
Market Structure
Price Level and Tariff Design
Private-Public Partnerships: Contracts and Risks
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What should be the involvement and mandate of the energy regulator in connection with promotion of Renewable Energy and what are the main challenges associated from a regulatory perspective?
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What should be the
involvement and mandate of
the energy regulator in
connection with promotion of
Renewable Energy and what
are the main challenges
associated from a regulatory
perspective?
What should be the
involvement and mandate of
the energy regulator in
connection with promotion of
Energy Efficiency and what
are the main challenges
associated from a regulatory
perspective?
What is the best choice of
regulatory instruments/tools
for Renewable Energy
promotion based on efficiency
and effectiveness of reaching
policy targets (FiT versus
Green Certificates versus
Central Procurement and
others)?
What is the best choice of
regulatory instruments/tools
for Energy Efficiency
promotion based on efficiency
and effectiveness of reaching
policy targets? (Energy
Efficiency Certificates versus
Central Procurement and
others)
You're in the section: Frequently Asked Questions -> Renewable Energy and Energy Efficiency -> What
should be the involvement and mandate of the energy regulator in connection with promotion of
Renewable Energy and what are the main challenges associated from a regulatory perspective?
[response prepared by Sanford Berg and Ashley Brown (with the assistance of anonymous reviewers, October
2012]
Level of Involvement for a Regulator: Policy-makers will set the targets and (often) procedures for
Renewable Energy (RE) initiatives. Their tools can include taxes, subsidies, and targets for utilities. Ultimately,
the regulator ends up implementing government policies. Although the boundaries between “policy-making” and
“regulating” are inherently fluid and uncertain, the role of the regulator in promoting RE is limited by legislative
and executive decisions. RE policies and frameworks are policy decisions that are customarily and perhaps,
preferably, taken by policy makers and not regulators. Policymakers, however, may choose to delegate these
decisions or a subset of them, to regulators; or they may choose to remain silent on such issues. In the former
case, of course, regulators have the power to exercise their discretion, while, in the latter, the scope of
regulatory discretion depends on what the legal system provides. For example, Kenya gives the regulator some
latitude in the design of auctions for Feed-in Tariffs.
Basic and macro policy, optimally, is set by the Government: new programs and targets (such as
percent of generation that involves renewables–renewable portfolio standards) should have a broad political
consensus, since the implications for energy costs (and therefore prices) and resource utilization can be
significant.
Regulators are creatures of the state and not necessarily of the Government: the party in power (the
Government) has the authority and the obligation to set basic policy. It not only has the capability, but its
action vests legitimacy, credibility, and legal authority to the regulatory regime. In many countries, policy on
RE is issued as RE laws (passed by the legislature). In others, the enabling legislation (or executive order)
provides broad energy sector objectives, which the regulatory commission then applies to specific RE
issues.
Policy vacuums and communication problems are an inherent in infrastructure and are to be
expected: political authorities should always have a mechanism for transparently offering their views to
regulators and vice versa. The problem is the non-transparent bypass of the regulatory processes that
seems likely to occur if regulators are not in a position to decide micro policy issues on their own. A potential
role of the energy sector regulator involves identifying issues that need to be resolved in the design,
development, and implementation of RE. Open channels of communication with various stakeholder groups
can be maintained through workshops and white papers.
What should be the involvement and mandate of the energyregulator in connection with promotion of Renewable Energyand what are the main challenges associated from aregulatory perspective?
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What should be the involvement and mandate of the energy regulator in connection with promotion of Renewable Energy and what are the main challenges associated from a regulatory perspective?
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Some policy issues require technical expertise to be resolved: If requested, the regulator could provide
technical support and inputs to the agency responsible for planning on matters such as expected costs of
renewable energy, impact of renewables on security of supply, and quality of service impacts of RE. This is
just one of the many roles the regulator could play in promoting cost-effective RE.
Sector regulators need to coordinate their decisions with other government agencies: Clean and
renewable energy is likely to be of concern to a number of organizations. “The regulator should enter into
memorandums of understanding (MOUs) with other entities that are promoting electrification, such as
ministries and electrification funds. Such MOUs should clarify respective roles and responsibilities and the
sequence of needed approvals. The overall goal should be to streamline the regulatory process by
minimizing unnecessary duplication and delays.” (Reiche, et. al.) Coordination is required for alignment with
other policies, incentives, and administrative processes (including licensing and permitting).
Table 1: Roles and Challenges for the Energy Sector Regulator in Different Phases of RE Policies
Phases of Renewable Energy
Policy
Roles Challenges
Defining government intentions/goals
and policies.
Establishing priorities and the timing
for meeting RE targets.
Obtaining citizen input into the
benefits and costs of RE initiatives.
Policy makers usually set
goals and policies in
national policy
statements, national
plans, decrees or other
formal official
announcements.
National policies and
legal framework set the
scope for regulation.
Building political support around RE
goals and justifying them on different
grounds:
Economic growth/industrial
development/jobs,
Climate change,
Energy Security, and
Energy access.
Access to regulatory expertise to
assist in this process.
Avoiding the influence of special
interests backing particular
technologies or investments in
politically important regions.
Choosing policy instrument(s): price
vs. quota, type of fiscal/financial
incentives, type of contract (type of
PPP).
Choosing policy instruments entails
an assessment of amount and
sources of subsidization (if any).
Policy makers usually
choose policy instruments
to achieve national goals.
Sometimes these
decisions are delegated
to regulatory bodies.
Regulators could provide
technical advice on
specific policy
instruments.
Frequent policy shifts or vague
policies (lack of prioritization)
Information asymmetries: the
regulator has less information on
costs than project developers.
Balancing the use of price and quota
instruments used to address different
segments of the RE market (different
technologies or different project
scales).
Designing policy instrument (s):
detailed description of policy
instruments (technologies/scales
targeted, levels, adjustment
mechanisms, terms, etc.)
Regulators usually design
the instruments details of
instruments are rarely
defined at the policy
level.
Adjusting price or quota levels when
there are severe information
limitations or when contracts have
already been signed without input
from agency specialists.
Designing Contracts: Purchased
Power Agreements (PPA) or other
contracts
Coordinating the activities of
Regulatory work with
input from other
stakeholders.
Refining Contracts over time to reflect
country/market development and
dynamics of existing financing
structures and nature and levels of
What should be the involvement and mandate of the energy regulator in connection with promotion of Renewable Energy and what are the main challenges associated from a regulatory perspective?
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different government agencies that
have responsibilities over siting,
resource concessions, etc.
risks.
Aligning
policies/regulations/administrative
processes across different sectors or
subsectors (e.g.; land use permits for
RE, resources-use concessions, etc.)
Operationalizing and implementing
RE policy:
Cost Benefit Analysis
Permits/licensing/registration
Reports
Consultations
Contract Oversight and
Adjustments
Oversight/Compliance
management
Performance analysis
Inter-agency Coordination
Streamlining multiple policies,
regulations, and administrative
processes (licensing)
Regulatory responsibility
Awareness and
support by agency
leadership
Technical skills of the
professional staff
Communication
channels that educate
stakeholders and
provide opportunities
for input from affected
parties
Continual refinement
and clarification
regarding how rules
are designed to
improve performance.
Establishing regulatory processes that
operationalize and implement RE:
Overarching Strategies towards
RE
Tactics for specific RE initiatives
Processes that are evidence-
based and methodologically sound
Regulatory culture that supports
RE
Internal policies that provide
legitimacy for the regulatory
rulings related to RE
Regular opportunities for obtaining
input from those affected by RE
Main Challenges Associated with Regulatory Functions Affecting Renewables:
The Table identifies challenges associated with renewables. FAQ 3 goes into greater detail on the role of the
regulator in seven different mechanisms for incentivizing RE: Feed-in Tariffs, Net Metering, Renewable Portfolio
Standards, Energy Auctions (tendering), Power Purchase Agreements, Direct Investment Support (including loan
guarantees and tax incentives), and Other Incentives (direct research and development grants and use of
targeted funds, assistance in resource mapping, encouragement of the voluntary sector, programs that make
green look good, and trade restrictions. However, these policies are generally outside regulatory purview. Note
that many of these initiatives involve distributed generation, so access to the grid, power quality, and related
issues need to be addressed by regulators in the design of the instruments. The challenges facing the regulator
are developed in more detail in FAQ 3, but the different types of challenges are examined here.
While public policy will determine the extent to which renewables are to be incorporated into the generation mix,
regulators implement that policy—thus affecting the pace and pattern of RE investments and connections to the
grid. Energy regulators often have authority to carry out a number of functions that have implications for the
financial feasibility of renewable energy projects.
Decisions regarding energy mix depend on key policy issues such as energy security, environmental policy and
rules, how consumers will pay for a cleaner energy mix, and funding sources (if the technology requires
subsidization from an external agency or cross-subsidization from customers). Such policies usually depend on
the Ministry of Energy (or whatever agency is responsible for expansion plans) and the Ministry of Finance
regarding sources and extent of subsidization). If the RE policy does not prioritize the objectives, the regulator
will have to balance the objectives identified in the enabling legislation (or executive order). This process can be
particularly contentious since the objectives are seldom prioritized: the balancing and timing of initiatives is often
left to the agency overseeing RE initiatives (Grace, Donovan, and Melnick).
Key challenges include:
What should be the involvement and mandate of the energy regulator in connection with promotion of Renewable Energy and what are the main challenges associated from a regulatory perspective?
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1. Legal Mandate: Does the regulatory commission have legal authority to undertake the function? Each of
the potential RE program listed above requires a clear regulatory framework if rules are to be established in
a timely and transparent manner. This challenge may be further complicated by a potential lack of clear legal
authority when other agencies have responsibilities related to RE, including siting or resource-use.
2. Clarity in Authority: Is there overlapping or unclear allocation of roles and responsibilities of different
agencies? The NARUC Handbook (Bjork, et. al., 2011, p. 9) recommends that regulators “Review legal and
administrative processes in other sectors that may impact RE advancements, including environmental siting
and permitting restrictions, environmental standards, and investment and procurement rules.”
3. Coherence: The internal consistency of RE programs is essential if they are to be cost-effective.
Unfortunately, stated policy objectives may not be prioritized, so regulators need to check the links between
programs and objectives to ensure that impacts are well-understood and that the beneficiaries are clearly
identified. If the affordability objective is applied very broadly, cash flows to the investor in renewables might
be reduced. Regulators are in a position to evaluate the internal consistency of RE programs, so that the
incentives (established by a number of agencies) reinforce one another. Policy and regulatory consistency is
important: the regulatory function should focus on identifying inconsistencies and promoting processes for
coordinating the implementation of RE policies.
4. Resources: Does the agency have the staff expertise and/or consulting budget that enables the functions
to be performed in a professional manner? For example, it is important that the regulator follows closely the
trend in capital costs of renewable technologies to avoid windfall profits under approved Feed-in Tariffs,
especially when these technologies are benefitting from regulated tariffs.
5. Transparent Processes: Do special interests representing particular technologies, regions of the country,
or politically powerful stakeholders have inappropriate input into the implementation of rules affecting RE? In
particular, can stakeholders bypass regulatory processes, limiting transparency and reducing the cost-
effectiveness of RE initiatives? Corruption, as reflected in bribery and fraud, raises the cost of doing
business and reduces the credibility of government officials promoting energy efficiency and renewable
energy. If citizens do not trust regulatory and corporate leaders, then the legitimacy of the system is called
into question. This observation implies that bidding procedures, the development of Feed-in Tariffs, and other
activities must be perceived as totally transparent and based on best-practice.
6. Funding: Is there stable and sufficient funding for the required investments? The political will can change
as new policy priorities emerge, making government funding unpredictable. The availability of donor and
private investment funds will depend on perceptions regarding the stability of the policy environment and on
forecasted net cash flows from RE projects.
Regulatory Functions Affecting Renewables: Functions that are often assigned regulatory commissions
include the following:
Issuing licenses related to regulatory functions: In many jurisdictions, the electricity regulator has the
responsibility for issuing a “certificate of use” after completion of capital investment in a facility. Such licensing
generally specifies operating standards that have impacts on cost and tariffs. For example, intermittent supply
introduces back-up issues for the utility, so regulators must monitor contractual arrangements with solar and
wind generators who do not provide firm capacity. Licensing of new generation, transmission, and distribution
facilities or approval of sites can be contentious given citizen concerns over Not In My Back Yard (NIMBY)
facilities. For example, wind power has been a source of complaints for those affected by new sites.
Setting performance standards: Performance standards on quality/reliability have cost/tariff implications
since these involve resources. To protect consumers from excessive prices while implementing public
policy, the regulator will need to prescribe procedures and standards for companies’ investment programs.
As renewable penetration within the system increases, the commission will need to adapt existing codes of
conduct and eventually develop new ones for generation, transmission and distribution companies,
ensuring that market participants have access to information in a timely manner. In addition, regulators
often oversee network expansion targets (including renewable portfolio standards and the issuance of
green certificates).
Monitoring the performance of regulated firms: Collecting and analyzing data on costs, revenues, and
performance is essential for tariff determination. Ensuring that Purchase Power Agreements (PPAs) for RE
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are consistent with model PPAs would be another regulatory task. Thus, monitoring renewable activities
falls under the purview of the regulator.
Establishing the price level and the structure of tariffs: It is reasonable for consumers to pay the costs
associated with utility generation diversification. Customers would be vulnerable to input price changes due
to the excessive dependence upon one fuel source. In addition, if public policy mandates a shift away from
fossil fuels, customers become responsible for covering the associated costs. However, the higher cost of
some renewables affects electricity affordability, so regulators must address trade-offs among policy
objectives. In the context of RE, this means that regulators analyze, evaluate, and approve rate designs,
including time of use rates and Feed-in tariffs.
Establishing a Uniform Accounting System: Operators should be required to file reports in formats
determined by the regulator. Evaluating the cost-effectiveness of renewables policies and energy efficiency
programs requires that operators provide data and reports and that regulators have the capacity to review
those studies. Access to information is necessary if RE programs are to be evaluated in timely manner and
refined based upon careful studies.
Arbitrating disputes among stakeholders: Regulators ensure that facts are well documented and that
different interests are well represented. Siting of new facilities (including distributed generation such as
photovoltaics), cost allocation among different customer classes, and interconnection rules have differential
effects on stakeholders. The regulatory commission is in a position to organize workshops and promote
dispute resolution.
Performing (usually via independent consultancy) management audits on regulated firms: Typically,
the regulator reviews the organizational elements of generation, transmission and distribution companies on
a regular basis to ensure cost effectiveness and a continuous and efficient supply of services. The
commission needs to review the performance of RE initiatives to determine whether goals being met in a
cost-effective manner.
Developing human resources for the regulatory commission: Recruitment and staff training warrant
particular attention as part of regular managerial responsibilities, since the implementation of RE policies
depends on the quality of the professionals who are conducting regulatory analyses. Agency budgets and
staff recruitment procedures must be appropriate for the tasks associated with implementing RE policies.
Reporting sector and commission activities to appropriate government authorities: A regulatory
agency should submit reports regarding sector activities to a higher authority. Given the expertise
assembled at a commission, the agency is in a position to provide information and advice to appropriate
government departments that are concerned with RE.
Thus, regulators will face decisions that affect the financial outcomes associated with RE investments. Specific
regulatory instruments for promoting RE are discussed in FAQ 3 in this series. A parallel set of challenges for
Energy Efficiency is introduced in FAQ 2.
International Confederation of Energy Regulators (2012). Report on Renewable Energy and Distributed
Generation: International Case Studies on Technical and Economic Considerations, Ref: I12-CC-17-03,
February 21, 2012, pp. 1-154.
Isabel Bjork, Catherine Connors, Thomas Welch, Deborah Shaw, William Hewitt (2011). Encouraging
Renewable Energy Development: A Handbook For International Energy Regulators, prepared by Pierce Atwood
LLP for NARUC, with USAID funding. January. pp. vii-138.
Ashley Brown, “Regulators, Policy Makers, and the Making of Policy: Who Does What and When Do They Do
It?
Grace, Robert C., Deborah A. Donovan, and Leah L. Melnick, When Renewable Energy Policy Objectives
Conflict: A Guide for Policymakers, National Regulatory Research Institute 11-17, October 2011
http://www.nrri.org/pubs/electricity/NRRI_RE_Policy_Obj_Conflict_Oct11-17.pdf
References
What should be the involvement and mandate of the energy regulator in connection with promotion of Renewable Energy and what are the main challenges associated from a regulatory perspective?
http://regulationbodyofknowledge.org/...-energy-regulator-in-connection-with-promotion-of-renewable-energy-and-what-are-the-main-challenges-associated-from-a-regulatory-perspective/[17/01/13 9:29:21 PM]
Kilian Reiche, Bernard Tenenbaum, and Clemencia Torres de Mästle, Electrification and Regulation: Principles
and a Model Law, World Bank. Energy and Mining Sector Board Discussion Paper No. 18, July 2006, 1-44.
What should be the involvement and mandate of the energy regulator in connection with promotion of Energy Efficiency and what are the main challenges associated from a regulatory perspective?
http://regulationbodyofknowledge.org/...-energy-regulator-in-connection-with-promotion-of-energy-efficiency-and-what-are-the-main-challenges-associated-from-a-regulatory-perspective/[17/01/13 9:29:54 PM]
What should be the
involvement and mandate of
the energy regulator in
connection with promotion of
Renewable Energy and what
are the main challenges
associated from a regulatory
perspective?
What should be the
involvement and mandate of
the energy regulator in
connection with promotion of
Energy Efficiency and what
are the main challenges
associated from a regulatory
perspective?
What is the best choice of
regulatory instruments/tools
for Renewable Energy
promotion based on efficiency
and effectiveness of reaching
policy targets (FiT versus
Green Certificates versus
Central Procurement and
others)?
What is the best choice of
regulatory instruments/tools
for Energy Efficiency
promotion based on efficiency
and effectiveness of reaching
policy targets? (Energy
Efficiency Certificates versus
Central Procurement and
others)
You're in the section: Frequently Asked Questions -> Renewable Energy and Energy Efficiency -> What
should be the involvement and mandate of the energy regulator in connection with promotion of Energy
Efficiency and what are the main challenges associated from a regulatory perspective?
Level of Involvement for a Regulator: Policy-makers will set the targets and (often) procedures for Energy
Efficiency (EE) initiatives. RE represents a supply-side intervention, and EE represents demand-side
management. In general, the regulator will have a less direct role in EE than in RE initiatives, since the latter
primarily involve adjustments by customers. However, EE basically promotes energy conservation—which
means that programs impact utility costs (directly through program costs and changes in production patterns)
and revenues. The context outlined in the FAQ on the involvement of the energy regulator with reference to the
renewable energy is the same as for this question. Thus, we will not go into setting policy vs. implementing that
policy and the other principles identified in the discussion of RE mandates and challenges. As in the case of
RE, regulators might have wide discretion in the implementation and/or monitoring EE initiatives. The most likely
roles involve giving technical advice to the agency developing EE initiatives, since changes in demand patterns
will have implications for the operations and investment plans of utilities (and for costs, security of supply and
quality of service) . As in the case of RE, energy efficiency is likely to be of concern to a number of
governmental organizations. Formal memorandums of understanding should be developed with entities
promoting EE, such as the Energy Ministry and environmental agencies. Such MOUs need to specify the
responsibilities of the different entities so as to avoid duplication of effort (reducing delays) and to limit the
likelihood that some problems will not be addressed.
Illustrative EE Programs: Many developing countries experience rationing of electricity, so improvements in
energy efficiency by on group make more electricity available for other customers. EE programs can be
incentivized by regulators or by other government agencies. The Bjork et. al. NARUC Handbook (2011)and The
International Confederation of Utility Regulators (ICER) volume from 2010 identify a number of EE programs
(which will be discussed in a later FAQ):
Utility EE Actions Incentivized by Regulators
1. Promoting utility-based EE/conservation programs
2. Incentivizing reduced Line Losses
3. Promoting improvements in Load Patterns and Power Factors (though time of use pricing and demand
side management)
4. Incentivizing improvements in System Reliability (reducing self-generation by larger customers)
5. Regulating meters, billing, and other consumption information provided to consumers
6. Encouraging utility energy audits
What should be the involvement and mandate of the energyregulator in connection with promotion of Energy Efficiencyand what are the main challenges associated from aregulatory perspective?
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What should be the involvement and mandate of the energy regulator in connection with promotion of Energy Efficiency and what are the main challenges associated from a regulatory perspective?
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7. Incentivizing smart grids
EE Activities Promoted by Other Agencies
1. Building Codes and Industry Standards for Products using Electricity: Minimal Role for the Sector
Regulator.
2. Government (taxpayer) Provision of Financial Support
3. Tradable Certificates/saving obligations on energy utilities
4. Tenders for EE initiatives
5. Voluntary agreements between industry and government
6. Energy end-use efficiency in the public (Government) sector (for example, schools and hospitals)
Main Challenges Associated with Regulatory Functions Affecting Energy Efficiency: As was noted in the
FAQ about the role of the energy regulator in connection with the promotion of renewable energy, public policy
will determine broad approaches to energy efficiency. However, initiatives undertaken by the utility must
generally be approved and certainly be monitored by the regulator, since these initiatives have implications for
cost and demand patterns (and therefore, the price level and average price). In countries where there are
energy shortages (and rationing), EE increases system reliability—improving the quality of service experienced
by customers. Thus, the role of regulators primarily involves providing technical input into the development of EE
policies initiated by other agencies or via legislated tax programs. However, EE and conservation programs
incentivized by the utility must be approved and monitored by the regulator to ensure that the programs are
well-designed and that they meet the objectives of the enabling legislation.
The key challenges are the same as the FAQ outlining the regulator’s role in renewable energy promotion (1)
legal mandate of the regulator, (2) clarity in roles and responsibilities of different agencies (including identifying
who has ultimate decision-authority), (3) coherence of programs (consistency across EE initiatives), (4)
resources of the agency (technical expertise for evaluating and monitoring utility initiatives and for assisting
external agencies), (5) transparent processes (so special interests cannot dominate the decision-process or
have an inside track on utility contracts), and (6) stable and predictable funding for EE programs. In addition, the
Regulator must determine (unless specified in law) which benefit-cost test is appropriate for evaluating utility-
based EE programs.
Benefit Cost Tests for Utility-Based EE Programs
A contentious issue is the standard to be used for evaluating EE programs. There are at least five alternative
tests: all five tests taken together provide a comprehensive picture of a program’s impact. However taken
individually, they will provide different rankings of alternative programs. Ultimately, the primary test adopted for
evaluating alternative programs will drive the net present value calculations (assuming there is agreement on
the appropriate discount rates to be used in the analysis). Determining the appropriate metrics depends on the
objectives of the program. Standard tools of finance provide key techniques for evaluating proposed programs
as well as their impacts. Net Present Value is the best indicator, since it captures monetary inflows and outflows
over time. However, part of the justification of EE programs is from the environmental benefits which are difficult
to quantify. Nevertheless, some attempt must be made so that programs can be compared and evaluated.
Reviewing the impacts of previous programs is crucial if decision-makers are to benefit from the lessons of the
past. When unintended consequences of actions begin to be noted, the policies should come under immediate
review.
There are several different tests that regulators employ to attempt to quantify the relative impact of
EE/conservation programs. The particular measure employed will depend on the scope and priorities of the EE
policy established by political actors, but it is likely that one measure alone will not provide a definitive answer
for regulators. The best approach might be to use the methods that best address the focus of the policy and
compare the results of the analysis. Ultimately, the regulatory ruling requires an analysis of the “no initiative”
scenario (without the EE program) so the analysis considers differences from the baseline. In addition to the
internal consistency of the programs, regulators must be aware of the effects of interactions between these
programs, as these interactions may change the impacts of individual programs or produce unintended
consequences. Five measures are outlined in Table 1, with a summary of the approach used by each standard,
and the question it attempts to address.
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Test Acronym Key Question
Answered
Summary Approach
Participant cost test PCT Will the participants
benefit over the
measure life?
Comparison of costs
and benefits of the
customer installing the
measure
Program administrator
cost test
PACT Will utility bills
increase?
Comparison of program
administrator costs to
supply-side resource
costs
Ratepayer impact
measure
RIM Will utility rates
increase?
Comparison of
administrator costs and
utility bill reductions to
supply-side resource
costs
Total resource cost
test
TRC Will the total costs of
energy in the utility
service territory
decrease?
Comparison of program
administrator and
customer costs to utility
resource savings
Societal cost test SCT Is the utility, state, or
nation better off as a
whole?
Comparison of society’s
costs of energy
efficiency to resource
savings and non-cash
costs and benefit
Component PCT PACT RIM TRC SCT
Energy and capacity
related avoided costs
- Benefit Benefit Benefit Benefit
Additional resource
savings
- - - Benefit Benefit
Non-monetized benefits - - - Benefit -
Incremental equipment and
install costs
Cost - - Cost Cost
Program overhead costs - Cost Cost Cost Cost
Table 1: The Five Principal Cost-Effectiveness Tests Used in Energy Efficiency
Source: Standard Practice Manual: Economic Analysis of Demand-Side Programs and Projects.
Furthermore, the discount rate used will differ among the tests: the California Standard Practice Manual
recommends participant’s discount rate for PCT, the utility’s WACC for RIM, PACT, and TRC, and the social
discount rate for SCT. So the regulator faces additional choices when evaluating utility-sponsored EE programs.
Another way of comparing the approaches is to look at different aspects of programs:
Table 2: Summary of Costs and Benefits Included in Each Test
What should be the involvement and mandate of the energy regulator in connection with promotion of Energy Efficiency and what are the main challenges associated from a regulatory perspective?
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Incentive payments Benefit Cost Cost - -
Bill Savings - Benefit - Cost -
The Standard Practice Manual goes into detail regarding the formulas for the various tests. Whether particular
impacts are “counted” or not affects whether a program will be viewed as cost-effective: the choice of a
particular test (or combination of tests) by the regulator significantly affects the types of EE programs that can
be implemented by the utility. Another issue is whether individual programs for particular customer groups (such
as those using emerging technologies or those directed at the poor) need to pass the test, or whether a portfolio
of projects should pass the test. Other indicators include the ratio of benefits to costs, internal rate of return,
levelized cost of conserved energy, and the payback period. However, Net Present Value provides the most
comprehensive measure for benefits and costs.
Regulatory Functions Affecting Energy Efficiency: Energy regulators have authority to carry out functions
that have implications for the financial feasibility of utility-based EE programs. Functions that are often assigned
regulatory commissions were listed in the FAQ outlining the energy regulator’s role in promoting renewable
energy, but are repeated here in abbreviated format, with specific applications to EE:
Issuing licenses related to regulatory functions: This function is less important for EE than for RE
since the former do not involve siting issues.
Setting performance standards: If any performance targets are established for EE (for reducing energy
consumption), these would be determined by broad public policy, leaving the sector regulator to implement
incentives that contributed to the achievement of these targets. Significant regulatory attention would be
devoted to the cost-effectiveness of programs under the control of utilities.
Monitoring the performance of regulated firms: As with RE, evaluating EE programs requires data
collection and analysis. An important task for regulators would be to ensure that contracts with external
service providers were designed and bid properly.
Establishing the price level and the structure of tariffs: When a customer makes energy efficiency
investment, quantity demanded is reduced—lowering the utility bill and improving reliability. If the utility
subsidizes the investment, regulators will need to analyze, evaluate, and approve utility-based programs
using tests described earlier. In addition, EE can be promoted by particular rate designs, including time of
use rates and industrial customer penalties for low power factors.
Establishing a Uniform Accounting System: Evaluating the cost-effectiveness of EE initiatives requires
that operators provide data and reports and that regulators have the capacity to review those studies. The
regulator must determine which benefit-cost test should be applied to utility programs.
Arbitrating disputes among stakeholders: Regulators can help resolve issues that are technical in
nature; for example, which benefit-cost test to use for evaluating EE programs. Different customer classes
will object to cross subsidization caused by utility programs. The regulatory commission is in a position to
organize workshops and promote dispute resolution.
Performing (usually via independent consultancy) management audits on regulated firms: The
regulator should review the organizational elements of EE programs on a regular basis to ensure cost
effectiveness: are the goals of EE programs being met in a cost-effective manner?
Developing human resources for the regulatory commission: The implementation of EE policies
depends on the quality of the professionals who are conducting regulatory analyses.
Reporting sector and commission activities to appropriate government authorities: Given the
expertise assembled at a commission, the agency can provide information and advice to appropriate
government departments that are concerned with EE.
Thus, regulators will make decisions that affect the funding of EE investments. Specific regulatory instruments
for promoting EE are discussed in greater detail in another FAQ.
What should be the involvement and mandate of the energy regulator in connection with promotion of Energy Efficiency and what are the main challenges associated from a regulatory perspective?
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Isabel Bjork, Catherine Connors, Thomas Welch, Deborah Shaw, William Hewitt (2011). Encouraging
Renewable Energy Development: A Handbook for International Energy Regulators, prepared by Pierce Atwood
LLP for NARUC, with USAID funding. January, pp. vii-138.
Energy Efficiency Governance Handbook (2010). International Energy Agency, 1-52.
ESMAP (2012) Energy Efficient Cities Initiative: Good Practices in City Energy Efficiency—Cape Town-Kuyasa
Settlement, South Africa. January. pp. 1-14.]
California Standard Practice Manual: Economic Analysis of Demand-Side Programs and Projects, (2001).
International Confederation of Energy Regulators, ICER (2010). A Description of Current Regulatory Practices
for the Promotion of Energy Efficiency, June 21, Ref. l10-CC-02-04 (pdf) 1-176.
Kilian Reiche, Bernard Tenenbaum, and Clemencia Torres de Mästle, Electrification and Regulation: Principles
and a Model Law, World Bank. Energy and Mining Sector Board Discussion Paper No. 18, July 2006, 1-44.
Limaye, D. R., Heffner, and Sarkar, (2008), An Analytical Compendium of Institutional Frameworks for Energy
Efficiency Implementation, Energy Sector Management Assistance Program (ESMAP) Formal Report 331/08,
October, www.indiaenvironmentportal.org.in/files/EE_Institutional.pdf.
Sarkar A. and J. Singh (2010), “Financing Energy Efficiency in Developing Countries—Lessons Learned and
Remaining Challenges”, Energy Policy.
World Bank Environment Department “World Bank GEF Energy Efficiency Portfolio Review and Practitioners’
Handbook” Thematic Discussion Paper January 21, 2004.
Beyond Bonn: World Bank Group Progress on Renewable Energy and Energy Efficiency in Fiscal 2005–2009.
World Bank Group Energy and Mining Sector Board. xvii-73.
Industrial Energy Efficiency for Sustainable Wealth Creation: Capturing Environmental, Economic, and Social
Dividends (2011). Industrial Development Report from UNIDO (United Nations Industrial Development
Organization), xviii-239.
Jollands, N. and Ellis Mark. “Energy Efficiency governance– an emerging priority” ECEEE 2009 Summer Study.
Pasquier, Sara Bryan “Implementation of the 25 energy efficiency policy recommendations in IEA member
countries: recent developments” Energy Efficiency Series IEA March 2011.
“Primer on Demand Side Management” Prepared by Charles River Associates for the World Bank February
2005. http://siteresources.worldbank.org/INTENERGY/Resources/PrimeronDemand-SideManagement.pdf
Taylor, Robert P., Chandrasekar Govindarajalu, Jeremy Levin, Anke S. Meyer, and William A. Ward (2008).
“Financing Energy Efficiency: Lessons from Brazil, China, India and Beyond”. The World Bank 2008.
References
Additional References:
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What should be the
involvement and mandate of
the energy regulator in
connection with promotion of
Renewable Energy and what
are the main challenges
associated from a regulatory
perspective?
What should be the
involvement and mandate of
the energy regulator in
connection with promotion of
Energy Efficiency and what
are the main challenges
associated from a regulatory
perspective?
What is the best choice of
regulatory instruments/tools
for Renewable Energy
promotion based on efficiency
and effectiveness of reaching
policy targets (FiT versus
Green Certificates versus
Central Procurement and
others)?
What is the best choice of
regulatory instruments/tools
for Energy Efficiency
promotion based on efficiency
and effectiveness of reaching
policy targets? (Energy
Efficiency Certificates versus
Central Procurement and
others)
You're in the section: Frequently Asked Questions -> Renewable Energy and Energy Efficiency -> What
is the best choice of regulatory instruments/tools for Renewable Energy promotion based on efficiency
and effectiveness of reaching policy targets (FiT versus Green Certificates versus Central Procurement
and others)?
[Response by Sanford Berg, November 2012]
In their review of RE policy instruments used around the world, including in six representative developing and
transition economies, Elizondo and Barroso (2011) identify the following lessons:
1. A tailor-made approach is necessary (reflecting the local market and institutional setting).
2. Policy sequencing is critical for policy effectiveness (since legal/regulatory frameworks for interconnection
and siting must be established before implementing RE policies).
3. Policies that successfully lead to the scale-up of renewable energy may not necessarily be efficient (so
the benefits and costs of programs must be carefully identified).
4. Policy interaction and compatibility need to be considered because complex interactions among programs
and unintended effects can reduce the net benefits of RE programs.
5. Policy and regulatory design is a dynamic process; for example, Feed-in Tariff policies have required
successive adjustments in various countries.
6. RE policy performance (effectiveness/efficiency) depends on a number of key factors including financial
sustainability, adequate infrastructure, and clear interconnection rules.
The NARUC Handbook identifies a number of regulatory instruments incentivizing a range of renewable energy
projects:
1. Feed-in Tariffs: tariff-based incentives that result in favorable tariff rates, ensuring that investors are
guaranteed income that covers costs and additional return on capital sufficient to motivate investment (which
can be uniform or differential across technologies);
2. Net Metering: a system whereby electricity produced in excess of the customer’s load is sold back to the
interconnecting utility, generally at the retail electricity rates;
3. Renewable Portfolio Standards (RPS), including Quota systems (and penalties for non-compliance), and
Green Credits (or tradable Renewable Energy Certificates (RECs);
4. Central Procurement via Energy Auctions (Tendering), by which investors compete for a project
What is the best choice of regulatory instruments/tools forRenewable Energy promotion based on efficiency andeffectiveness of reaching policy targets (FiT versus GreenCertificates versus Central Procurement and others)?
Introduction
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
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through a competitive bidding system initiated by a government department or agency;
5. Power purchase agreements, which are contracts between a seller and a buyer: these may differ
depending on the type of generation technology;
6. Direct investment support, including loan guarantees and tax incentives: although regulators would
generally not have control over such funds, the agency might be given the responsibility for monitoring the
cost-effectiveness of such programs;
7. Other Incentives for RE development:
1. Direct research and development grants and use of targeted funds
2. Assistance in resource mapping
3. Encouraging the voluntary sector
4. Making green look good
5. Trade restrictions
RE instruments can be classified as price-based (FiTs) or quantity-based (RPS). Experience suggests that FiTs
are effective at reducing investor risk (compared with RPS or quota instruments). However, there is some
evidence that quota mechanisms (an RPS-REC scheme) can be less expensive than price-based instruments
like FiTs (which involve high subsidy rates for less mature RE technologies). RPS-REC programs promote
competition among technologies, which gives an advantage to more mature (and less expensive) technologies.
Central Procurement or Purchased Power Agreements represent mechanisms for acquiring energy from
renewables. As of 2011, green house-cap-and-trade frameworks and carbon taxes were not part of any
developing country’s portfolio of policies promoting RE (Elizondo and Barroso, 2011)
Many of these initiatives involve distributed generation, so access to the grid, power quality, and other issues
need to be addressed by regulators in the design of the instruments. The strengths and limitations of the RE
instruments are noted below, along with a description of the role of the regulator in implementing each policy
option. Note that Elizondo and Barroso (2011) provide a Glossary of terms and recent renewable energy
experience in selected developing countries. In addition, the REToolkit is a comprehensive resource for
renewable energy development, describing grid, mini-grid, and stand-alone systems. The legal and regulatory
barriers to independent power producers include lack of transmission access, lack of incentives for regulated
utilities, unfavorable pricing rules, and excessive permitting requirements and siting restrictions. Energy sector
regulators can address each of these issues in the context of specific programs (described in detail in the
REToolkit)
According to the NARUC Handbook (p. 39), “The most important components of Feed-in Tariffs (the details of
which vary across jurisdictions to meet country-specific needs) are:
1. A fixed price set in law, regulation or decision (or, in the more advanced markets, a premium tariff
structure which is the market price with a fixed added amount).
2. The fixed price level is often different across technologies (e.g., hydropower commands a different price
than solar).
3. In some developed feed-in tariff frameworks, stepped tariff designs (e.g., differentiation within same
technology based on site, plant size or conditions that affect the yield). A way to encourage early investment
is to stagger new feed-in tariffs so that they decrease annually; this technique motivates entities to install
renewable energy technologies in the current year – rather than waiting until the price of RE systems
decreases – while accounting for developments in technology.
4. Process and period for tariff revision, limiting the amount of time that a feed-in tariff applies. This gives
adequate comfort to investors but also ensures that incentives are in effect only as needed, and offers a
process for reconsideration if expected market integration is not yet reached and/or incentives remain
necessary.
5. Long Duration [Contract Length]. Most variants and best practice hold that the price should be guaranteed
for a specific period of time reflecting the cost of investment, usually around 20 years (according to the
Pierce Atwood Report).
1. Feed-in Tariffs (FiTs)
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6. Purchase obligations, requiring that a utility or a transmission company, distributor or supplier purchase
the RE-generated power at a rate determined by public authorities. In most cases, regulatory measures are
applied to impose an obligation on electricity utilities to pay the (independent) power producer a price as
specified by the government.”
Role of the Regulator: Regulatory oversight of FiT programs is essential, whether the price is based on a pre-
determined number (and with some maximum capacity), an auction/bidding process, or avoided cost. In each
case, the regulator monitors activities to ensure abuses do not arise. The avoided social cost of additional fossil-
fuel generation includes local environmental externality costs (or, more broadly—but more difficult to compute—
the global externality). How these external costs are factored into program evaluation is partly dependent on the
enabling legislation (or executive order). Two issues warrant particular attention:
1. Differential FiTs: Tariffs that are dependent on the particular technology are problematic, since they can
greatly increase the cost of obtaining RE. Nations may have a comparative advantage in applying a
particular technology, so it is unclear why very expensive technologies should be encouraged when they are
so costly. Furthermore, the main beneficiaries of (for example) wind energy FiT might be wind turbine
manufacturers based in developed countries.
Case: Tanzania has adopted a technology-neutral FiT, thus avoiding extremely high cost technologies.
2. Flexibility: One of the most important lessons learned from the FiT experience (and more broadly
preferential tariffs for renewable energy) is that sufficient flexibility must be built into the rules to ensure that
prices adapt to changes in the market, while still offering the security that investors need. A good regulator
strives to get this balance right.
Net Metering is generally applicable to consumers who own relatively small renewable facilities. The system
owner (of a solar or wind facility) receives a credit on her electricity bill. Unlike the case a FiT, the owner is
generally paid the retail price for excess electricity produced by the (home or small commercial) customer.
Since most electricity meters can run in both directions, the meter serves as a mechanism for reducing bills and
(possibly) making money for the small customer. To reduce transactions costs, the savings might be rolled over
to the next month. Net metering could apply variable pricing for (more expensive) Time of Use meters.
Role of the Regulator: So long as enabling legislation encourages or requires net metering, the energy
regulator will need to oversee the system and evaluate its effectiveness in meeting RE objectives. According to
the REToolkit (p. 65): “Success in attracting new renewable energy investments and capacity depends on:
1. Limits set on participation (capacity caps, number of customers, or share of peak demand);
2. the price paid, if any, for net excess generation;
3. the existence of grid connection standards; and
4. enforcement mechanisms”
Thus, regulatory rules for each of these elements are essential for the effective application of this mechanism.
Net metering can be used in conjunction with quantity mandates to meet aggregate renewable energy targets.
RPS is market-based, so it suitable in situations where there are many buyers (distributors) and suppliers
(generators using technologies based on renewable energy). In addition, private sector participation can be
encouraged—which brings more financial capital into the industry. Voluntary RPS systems have been
announced in a number of jurisdictions, but without clear incentives to participate, distribution utilities tend to be
unwilling to purchase high cost electricity. A quota or purchase obligation (with penalties for missing the
target) can be based on a percentage of the total actual load or on a specific level of kWH (which raises costs if
demand is lower than expected). Typically, distribution companies (or final suppliers/retailers) are the entities
mandated to meet the standard, with a penalty for non-compliance (or an associated buy-out price per MWh for
shortfalls).
1. Certificates for renewables can be provided by a government agency that certifies the MWh produced
2. Net Metering
3. Renewable Portfolio Standards (RPS)
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by a qualified generator. The buyer (distribution utility) then pays the price for the RE, and gains certification
for its purchase. A single (electronic) registry keeps track of the certificates. The registry can also serve as a
trading platform to reduce transactions cost and to enable other stakeholders to purchase certificates to
encourage RE development (see auctions, below). In extreme circumstances, the responsible agency could
issue waivers, but the circumstances should be clearly specified in advance so the target does not become
a “soft (politically-driven) constraint”.
2. Co-existence and evolution of support mechanisms: there is evidence that countries with FiT have
moved to RPS and certificates.
3. Funds from penalties can be applied to RE or EE programs if the enabling legislation allows. To
mitigate potential price volatility for the certificates, there can be a virtual price cap (i.e. non-compliance fee)
and a floor.
4. Limitations of RPS: If solar PV is the dominant technology, then RPS may not the preferred instrument.
Based on international experience, small solar PV may be best supported via FiT.
Role of the Regulator: So long as enabling legislation establishes RPS, the energy regulator will need to
oversee the system and evaluate its effectiveness in meeting RE objectives. Generally, some other agency is
responsible for certifying the generators and handling the certification system.
Energy auctions must be well designed. There are a “number of methods for determining sales price. Interested
parties place bids and the highest bidder obtains the item if the bid is greater than the reservation price
(minimum acceptable bid). Alternatively, there can be an auction for a subsidy to provide a service (say, to a
high cost, un-served geographic area); in such cases, the lowest bid wins the subsidy. There are a number of
different types of auctions with a variety of characteristics, including Dutch auctions and second price auctions.”
(BoKIR Glossary) The rationales behind auctions are numerous:
1. Efficiency: If the number of bidders to provide renewable energy is enough, those with the lowest cost
will win the contracts. Rather than setting low reserve prices, those operating the auction should seek to
expand the number of bidders.
2. Use of Information: Those with information (producers) make bidding decisions based on their
experience and (well-informed) expectations.
3. Price Discovery: Auctions can be used to discover the price that potential investors in a particular
technology (like solar) would require. For example, Brazil held reverse auctions for wind energy in 2011,
leading to prices as low as $60 per MWh; the auction yielded a total of 2.9 giga-watts (GW) of energy.
4. Transparency: Auctions can be designed to be transparent, technology neutral, and simple. Investor’s
perceptions regarding the fairness of the process are crucial for the auction’s success.
5. Contract Design: The product (kWH) being acquired can be clearly defined. Well-designed contracts
specify the rights and obligations of all parties. Safeguards against non-performance can be utilized,
including warranties.
Role of the Regulator: The sector regulator may not be the agency holding the auction, but since the costs will
affect the final prices paid by consumers, the regulator should monitor the process to ensure that best practice
is adopted. An inadequate number of bidders or tacit collusion can yield high prices for purchasers. Strategic
behavior among bidders can lead to high prices. In addition, the sector regulator should ensure that risk
allocation issues are addressed in the resulting contracts. Risk is difficult to handle since the winner is often in a
strong position to renegotiate the terms and conditions of the contract. Because of the winner’s curse and other
issues associated with auctions, various formats have been suggested to ameliorate potential problems.
However, complicated formats should be avoided in the early stages of RE acquisition. The ESMAP Report by
Bessant-Jones et. al. provide a thorough overview of bidding and other risk assessment issues.
PPAs have been widely utilized to obtain RE capacity and MWh. The agreement should be based on an auction
4. Energy Auctions
5. Power Purchase Agreements (PPAs)
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or bidding process to ensure least-cost acquisition of the electricity generated using renewable energy. Bessant-
Jones et. al. (2008) propose a Benchmarking methodology in an ESMAP Report, including attention to examines
legal infrastructure, solicitation for bids (and the importance of competition), power sales enhancements (like
renewable set-asides or net metering), and tariff design (tariff floors, capacity tariffs, or renewable premiums).
Role of the Regulator: The potential roles of the regulator include ensuring the transparency of bidding
processes, licensing facilities, arbitrating disputes, evaluating the prudency of contracts (without engaging in
retrospective regulation), and setting the terms and conditions for interconnection. The legal infrastructure, bid
solicitation procedures, power sales enhancements, and tariff design are discussed in detail elsewhere. Bessant-
Jones et. al. (p.4) identify possible approaches to regulatory reviews of Power Purchase Contracts, and include
examples from developing countries:
Conduct
1. Assist in negotiating PPAs
2. Before or after the fact regulatory approval of PPAs
3. Standardized/model PPA
4. Mandated (competitive) Procurement guidelines
Performance
1. Administratively specify a maximum price
2. Tie maximum price to competitive power sales
3. Benchmarking of overall power purchase costs of distribution companies
4. Benchmarking of individual PPAs
The NARUC Handbook (p. 43) presents other considerations for regulators: “Procurements should be offered in
stages, so that while PPAs are useful to provide security, the purchase and sale process should be staggered to
allow for market changes and not to tie up the market in one or even a few large deals. As RE technologies
mature, they will become more efficient and less costly. Utilities should stage their Request for Proposal (RFP)
process to take advantage of these future efficiencies. Similar to staged procurements, competitive processes
such as auctions can be used to ensure that efficiencies are wrung from project developers. The RFP process
must be transparent and fair to all stakeholders. This will allow competition to flourish and give customers
greater access to choice. As part of this transparency, the tendering framework should incorporate
considerations for how to open competition to smaller, less established entities/project developers.” Clearly, the
sector regulator has a number of actions that can promote cost-effective PPAs.
Subsidizing RE production is one way to promote new capacity, but if the source of funds is uncertain or
unsustainable, the initiative is unlikely to be successful. For example, a particular fund might be viewed as an ad
hoc source of funding that may not be sustainable. In addition, various tax incentives have been utilized to
promote RE. The NARUC Handbook (p. 32) lists the four policies as promoting RE investments, with a two
others from the REToolkits:
1. Property and sales tax incentives
2. Production and investment tax credits (via rebates, exemptions on royalties, tax credits, accelerated
depreciation)
3. Grant or rebate programs for RE developers and owners
4. Loan guarantee programs
5. Trade restrictions (quotas, trade embargoes, and technical restrictions represent another form of subsidy,
though these can violate international trade agreements)
6. Government procurement (of infrastructure or specific technologies for government facilities)
Role of the Regulator: These policies are generally outside regulatory purview. Of course, reports on the
effectiveness of these programs can help policy-makers improve tax incentives.
6. Direct Investment Support
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Other incentives fall into at least four categories:
1. Direct research and development grants and use of targeted funds: Local universities train those
who will be managing and operating RE initiatives. Colleges of Business and Engineering are in a good
position to provide research that can improve prospects.
2. Assistance in resource mapping: Thermal, hydro, solar, and wind all have geographic elements.
Specialists in those fields (from universities or consulting firms) can be utilized to provide a factual basis for
decision-makers. Managers need data on the features of the resource; policy-makers need information on
the implications of over-use or on potential unintended consequences.
3. Encouraging the voluntary sector: Non-governmental organizations can be useful allies in the
development of RE strategies, especially when there are small projects affecting local communities.
4. Making green look good: Public relations cannot make a bad project look good, but it can be necessary
for siting and other issues, where community acceptance is crucial. Without a public consensus behind
renewables, those benefitting from current institutional arrangements can block RE initiatives. The sector
regulator can hold regional workshops that promote public participation and educate the citizenry.
Role of the Regulator: The sector regulator plays a somewhat tangential role in these initiatives. More
specialized agencies will fund technical research or engage in resource mapping. Ultimately, the commercial
viability of RE programs depends on factors other than “voluntary” organizations or actions, but a supporting
regulatory framework can make a difference.
Seven types of RE programs have been surveyed. They can be used in combination and scaled up as particular
initiatives prove cost-effective. The programs fall into four main categories:
Price Based Incentives: FiTs (and net metering),
Quantity Based Incentives or Quota Obligations: Renewable Portfolio Standards/Renewable Energy
Certificates, and Competitive Procurement (auctions)
Fiscal and Financial Incentives: Tax credits, government subsidies and loan guarantees
Voluntary Measures
Readers are advised to see Elizondo and Barroso (2011) who present a Table (Appendix 3) that compares the
investment risks, effectiveness/efficiency, and complexity of price and quantity-based RE instruments. One role
of the sector regulator is to promote transparency and stakeholder participation, so the risks are clearly
understood and mitigated where possible. Each of the program types has different features: securing financing,
predicting revenue streams, devising incentives for cost containment, and designing contracts.
At a minimum, regulators are encouraged to seek least-cost technologies to limit the impact on customer bills.
Lessons from other countries should be researched. For example, Sargsyan, et. al (2011) draw lessons from
experiences in India. Finally, the policy instruments need to be well developed and carefully utilized. Systematic
review of policy impacts is necessary if cost-effective programs are to be expanded and weak programs pruned
from the nation’s RE policy portfolio. Regulators can play a particularly valuable role in the evaluating RE
programs.
Elizondo, Gabriela and Luiz Augusto Barroso (2011). Design and Performance of Policy Instruments to Promote
the Development of Renewable Energy: Emerging Experience in Selected Developing Countries. Energy and
Mining Sector Board Discussion Paper No. 22 (April) pp. 1-45.
Bessant-Jones, John, Bernard Tenenbaum and Prasad Tallapragada (2008) Regulatory Review of Power
Purchase Agreements: A Proposed Benchmarking Methodology, ESMAP Report 337/08 October. viii-81.
7. Other Incentives
Conclusions
References
What is the best choice of regulatory instruments/tools for Renewable Energy promotion based on efficiency and effectiveness of reaching policy targets (FiT versus Green Certificates versus Central Procurem...
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Bjork, Isabel, Catherine Connors, Thomas Welch, Deborah Shaw, William Hewitt, Encouraging Renewable
Energy Development: A Handbook for International Energy Regulators, prepared by Pierce Atwood LLP for
NARUC, with USAID funding. January 2011. vii-138.
Joskow, Paul L. (2011). “Comparing the Costs of Intermittent and Dispatchable Electricity Generating
Technologies.”
Taylor, Julie (2010). Feed-in Tariffs (FIT): Frequently Asked Questions for State Utility Commissions, NARUC,
funded by the U.S. DOE Solar Energy Technologies Program, 1-14.
GET FiT Program: Global Energy Transfer Feed-in Tariffs for Developing Countries (2010), DB Climate Change
Advisors (Deutsche Bank Group) April, 1-62.
Ferry, Steven (2004). Small Power Purchase Agreement Application for Renewable Energy Development:
Lessons from Five Asian Countries, Asia Alternative Energy Program, The World Bank, February, xvi-93.
Jan Hamrin, Dan Lieberman, Meredith Wingate (2006). Regulator’s Handbook on Renewable Energy Programs
& Tariffs). Center for Resource Solutions, March, iii-72.
Kilian Reiche, Bernard Tenenbaum, and Clemencia Torres de Mästle (2006), Electrification and Regulation:
Principles and a Model Law, Energy and Mining Sector Board Discussion Paper No. 18, July, 1-44.
Maurer, Luiz T. A., and Luiz Barroso. (2010). A Strategic Overview on Efficient Energy Procurement and Best
Practices in Electricity Auctions. Washington, D.C.: World Bank.
Model Interconnection Procedures and Agreement for Small Distributed Generation Resources, (2003) National
Association of Regulatory Utility Commissioners (October), Funded by the U.S. Department of Energy’s Office of
Distributed Energy Resources through the National Renewable Energy Laboratory, vi-46.
Ölz, Samantha (2011). Deploying Renewables: Principles for Effective Policies, International Energy Agency, 1-
198.
Sargsyan, Gevorg, Mikul Bhatia, Sudeshna Ghosh Banerjee, Krishnan Raghunathan, and Ruchi Soni (2011).
Unleashing the Potential of Renewable Energy in India, The World Bank. pp. xv-39.
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What should be the
involvement and mandate of
the energy regulator in
connection with promotion of
Renewable Energy and what
are the main challenges
associated from a regulatory
perspective?
What should be the
involvement and mandate of
the energy regulator in
connection with promotion of
Energy Efficiency and what
are the main challenges
associated from a regulatory
perspective?
What is the best choice of
regulatory instruments/tools
for Renewable Energy
promotion based on efficiency
and effectiveness of reaching
policy targets (FiT versus
Green Certificates versus
Central Procurement and
others)?
What is the best choice of
regulatory instruments/tools
for Energy Efficiency
promotion based on efficiency
and effectiveness of reaching
policy targets? (Energy
Efficiency Certificates versus
Central Procurement and
others)
You're in the section: Frequently Asked Questions -> Renewable Energy and Energy Efficiency -> What
is the best choice of regulatory instruments/tools for Energy Efficiency promotion based on efficiency and
effectiveness of reaching policy targets? (Energy Efficiency Certificates versus Central Procurement and
others)
[Response by Sanford Berg and Achala Acharya, November 2012. Helpful comments from reviewers are
gratefully acknowledged. This write-up draws upon a number of resources, including the IEA Energy Efficiency
Governance Handbook (2010) and the International Confederation of Utility Regulators’ A Description of Current
Regulatory Practices for the Promotion of Energy Efficiency (2010).]
The renewable energy FAQ on the role of the sector regulator in promoting energy efficiency listed a set of tools
available to regulators for promoting demand-side initiatives in support of conservation and EE. While market
failures might justify government playing a role in EE, there is also the possibility of government failure, as when
energy efficiency initiatives are the result of special interest lobbying that benefit one set of stakeholders but
results in cost burdens being met other stakeholders, raising questions of fairness. In addition, the benefits
might not exceed the costs of particular EE programs; this possibility raises the question of efficiency. The
advantages and disadvantages of incentivizing utilities to make EE investments are addressed in the concluding
section.
Realistic targets are essential if programs are to be developed and implemented for reasonable time frames. If
targets are too easy to hit, they are unnecessary (and the incentives utilized are likely to be excessive). If the
targets are too difficult to hit, the organization actually implementing the program will anticipate failure, and
possibly reduce its own efforts. The FAQ on the role of the sector regulator in energy efficiency identified two
types of initiatives promoting EE: utility-based EE actions incentivized by the sector regulator and activities
promoted by other agencies that might seek advice from the sector regulator. The phases of EE policies, roles
of the regulator, and challenges are outlined in the Table below:
Table: Role of the Regulator in Applying Instruments that Promote Energy Efficiency
Phases of Energy Efficiency
Policies
Role of Regulator Challenges
1. Defining government Policy makers set goals and How to build political support
What is the best choice of regulatory instruments/tools forEnergy Efficiency promotion based on efficiency andeffectiveness of reaching policy targets? (Energy EfficiencyCertificates versus Central Procurement and others)
Introduction:
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
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intentions, goals, and
policies.
policies usually in national policy
statements, national plans,
executive decrees or other formal
official announcements.National
policies and legal framework set
the scope (tasks) for regulation
around EE goals and targets.
How to evaluate program
impacts on key objectives:
Economic growth/industrial
development,
Climate change,
Energy Security, and
Energy access.
How to prioritize objectives to
facilitate the best sequencing of
initiatives
2. Identifying and Choosing
utility-based programs and
activities conducted by
other entities.
Choice of policy instruments
entails an assessment of the
amount and sources of subsidies
(if any)
Instruments include Energy
Saving Certificates—ESC (“White
Certificates” or Energy Efficiency
Credits—EECs) and Centralized
Procurement
Policy makers usually choose
policy instruments to achieve
national goals.
Sometimes decisions about
instruments are delegated to
regulatory bodies.
Regulators could be asked to
provide technical advice on
specific policy instruments.
Danger of frequent policy shifts.
Regulator has less information
on costs than those
implementing programs.
Determining the appropriate
standards to be used in
selecting utility based programs
that balance efficiency and
fairness.
Issues:
implementing agencies,
resourcing requirements,
role of energy providers,
stakeholder engagement,
public-private sector co-
operation, &
international assistance
3. Design of policies and
instruments for Utility-
Based Programs
EE/conservation programs as part
of Integrated Resource Planning
(IRP)
Reduced Line Losses
Improvements in Load Patterns
and Power Factors (TOU pricing
and DSM)
Improvements in System
Reliability (reducing self-
generation by larger customers)
Consumption information
provided to consumers (meters,
billing)
Utility energy audits
Smart grids
Utility-based programs involve
regulatory rulings since the details
of policy instruments are rarely
defined at the policy
level.Regulators could be asked to
provide advice on other
government-sponsored EE
programs:
Building Codes and Industry
Standards for Products using
Electricity
Government (taxpayer) Provision
of Financial Support
Tradable Certificates/saving
obligations on energy utilities
Tenders for EE initiatives
Voluntary agreements between
industry and government
Energy end-use efficiency in the
Government sector (for example,
How to deal with information
constraints faced by regulator
for determining
cost-effectiveness of
alternative programs
scale and timing of those
programs
Does the utility have the
technical and managerial
capacity to carry out a wide
range of EE programs or
should programs be highly
focused?
What is the appropriate mix of
utility-based programs and
initiatives sponsored/funded by
other entities?
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schools or hospitals)
4. Design of Incentives:
Utility-based programs or
Outsourced (to Energy Service
Companies (ESCOs))
Regulatory Work for utility
programsCustomer-based
programs: ESCOs contract to
provide services that save energy.
Refine programs and incentives
over time depending on
country/market development,
and dynamics/types of existing
financing structures and nature
and levels of risks
Aligning policies, regulations,
administrative processes
across programs
5. Operationalization and
Implementation of EE
policy:
On-going Benefit-Cost Analysis
Regulatory Oversight/Compliance
Reports to Other Entities
Periodic Stakeholder Workshops
Performance analysis
Fine-tuning of Programs
Coordination with other agencies
Streamlining procedures,
regulations, and administrative
processes
Regulatory Work for utility
programs
How to attract and retain
technical staff capable of
performing necessary
regulatory functions.
How to establishing a
regulatory process that is
transparent and predictable:
strategies,
tactics,
operational methods,
internal policies and
culture
How to communicate with
stakeholders to promote
legitimacy to the
implementation of EE policy.
The Table indicates a number of roles for sector regulators. In addition, the promotion of EE can involve the
removal of regulatory barriers to EE:
Energy tariffs that discourage customer EE investment (such as declining block prices or pricing below
marginal cost).
Incentive structures that encourage energy providers to sell energy rather than invest in cost-effective energy
efficiency.
Institutional bias towards supply-side investments: engineers are trained to build and operate electrical
systems.
Energy markets can have pricing distortions: price is administratively set by regulatory bodies subject to political
pressures. Excessively low prices tend to reduce the private benefits from investments in energy efficient
technology. So customers have less incentive to engage in conservation. In principle, excessively low prices
provide a positive incentive for the distribution utility to promote conservation and energy efficiency. If the price
is less than marginal cost, a reduction in consumption increases the utility’s net cash flow. However, EE has up-
front costs as opposed to “costless” rolling black-outs (reduced reliability), brown-outs (intentional drops in
voltage to reduce load), and delays in expanding the distribution network. If there are no penalties for the latter
developments, managers may choose not to add EE initiatives to their current responsibilities unless there are
incentives to do so.
There are two broad sets of instruments for reducing emissions or promoting EE; setting prices or quantities.
The basic issue involves how to deal with the uncertainty regarding compliance costs for reducing emissions (or
Instruments
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for reducing kWh consumption). When a price is set, as in the form of a tax on emissions, utilities will reduce
emissions up to the point where the additional costs of compliance equals the tax. The utility would not spend
money on reducing emissions when it is less expensive to pay the tax. However, the outcome is not known in
advance, since policy-makers are not sure about the cost of compliance. On the other hand, quantity controls
(limiting emissions by mandating targets) are generally handled via tradable permits or quotas that establish the
targets without knowing the marginal cost of meeting the target. Utilities are issued a permit allowing them to
emit a particular quantity. The target can be met by reducing their own emissions or from buying “permits” or
certificates from utilities that find it relatively inexpensive to meet their targets. Such utilities reduce emissions
more than required, and so they have permits they can sell. Thus, the quantity targets are met, but policy-
makers do not know the marginal cost of meeting the targets in advance.
In the context of EE, entities adopt specific programs (such as conducting energy audits or mandating particular
technologies like compact fluorescent lighting) that reduce electricity consumption. Energy Efficiency Certificates
(EECs) involve setting quantity targets for each utility, so the costs of meeting the targets are not known in
advance. EECs and procurement programs are briefly summarized below.
Energy Efficiency Certificates (EECs): Also known as White Certificates and Energy Efficiency Credits
(EECs), EECs certify the attainment of a certain decrease in energy consumption. These targets imply
reductions from some baseline (actual or predicted). Italy, France, and Denmark (in 2005-2006) initiated
programs whereby producers or distributors implement EE/conservation projects that reduce energy
consumption. If target are not met, there are penalties. The introduction of tradability promotes the least-cost
achievement of targets and should stimulate activities by ESCOs. However, Energy Efficiency Certificate
programs can involve substantial set-up and transaction costs (developing the system, determining a baseline,
and authenticating savings).
EEC programs involve certification schemes that include1
1. Appointing an independent body for issuing certificates,
2. Clearly defining certificates: measurement, technologies, eligibility, validity, etc.
3. Formulating “rules of the game” (trading, parties, compliance),
4. Establishing a registration system and systems for monitoring and verifying savings,
5. Formulating compliance rules and setting penalties for non-achievement of targets,
6. Organizing the redemption of certificates.
In general, the sector regulator would not be the agency responsible for the measurement and verification of
EECs but would be involved in the development of systems—particularly as it impacts utilities and customers.
EE has implications for utility load forecasting, program costs, investment planning, and other managerial
responsibilities.
Centralized Procurement: Utilities might provide energy conservation initiatives through energy audits and
other programs. Alternatively, the delivery of such services might be provided by Energy Service Companies
(ESCOs). The same kinds of issues arising for PPAs for renewable energy (supply-side) surround the
procurement of EE (demand-side), so they will not be discussed in detail here. Developing comprehensive
contracts and verifying performance (by the utility or an ESCO) are two fundamental tasks for the regulator.
Energy Efficiency Governance: The IEA Energy Efficiency Governance Handbook goes into much more detail
on the importance of having a coherent system for developing, incentivizing, and evaluating energy efficiency
programs. There is much to be learned from experiences in other countries, so networking with other regulators
and with agencies within the country represent an important way to avoid repeating the mistakes of others. The
Handbook begins with the enabling framework—laws and decrees, strategies and action plans, and funding
mechanisms. Each of these elements undergirds a sound framework that ensures citizen input, transparency,
and resources. Government programs are seldom self-implementing. Responsible agencies must develop
strategies for achieving the objectives stated in the legislation or executive order. In addition, quantitative, time-
bound goals or targets should be established to facilitate monitoring. The Handbook proposes guidelines for
setting EE targets (p. 40), such as not being excessively ambitious, being underpinned by analysis, reflecting
input from stakeholders (consultation), and communicating and documenting targets in a clear manner. Country
experiences are also summarized (p. 37).
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Since those policies most relevant for sector regulators have already been identified in another FAQ, here we
list the policies using the categories presented in the IEA Handbook (Table 3). However, we do not attempt to
describe them in any detail.
1. Reduced commercial and non-commercial line losses: To the extent that the utility experiences
significant theft and has not optimized its transmission and distribution system, electricity that is produced
does not reach consumers who are paying for it. The difference between energy produced and energy sold
constitute line losses. Regulatory incentives to reduce line losses represent a strategy for promoting energy
efficiency. Of course, the regulator should not micro-manage how the utility reduces these losses, since
these involve engineering and economic trade-offs requiring substantial operating information.
Case:In Jamaica, JPS had several areas of Kingston with significant demands but few paying customers.
Non-commercial losses (through illegal and unsafe connections) were substantial. After a major initiative
(involving local government and the community), poor families were safely connected to the grid and overall
consumption fell. Some of that drop can be attributed to conservation activities of households and some due
to inability to afford the quantity that had been previously consumed at a zero price.
2. Improvements in Load Patterns: An electricity system with high peak demands relative to base loads
will tend to have peaking units that have low capital costs, but high operating costs. When consumers face a
uniform price throughout the day, they have no incentive to cut back on consumption during those periods
where marginal cost is quite high. Reducing peak demands can lead to lower overall production costs and
(possibly) to lower emissions (depending on the configuration of generating units). In some cases, seasonal
rates might make sense, since there are no additional metering costs and the seasonal peaks can be
shaved. Time-of-use pricing for large users and demand side management programs can shift demand to
off-peak periods, potentially improving production efficiency. Because the use of prices involves greater
uncertainty about customer responses, direct load control or interruptible rates for industrial customers
are sometimes used to improve management confidence in obtaining shifts in demand patterns.“Demand
Side Management (DSM) programs refer to actions taken on the customer’s side of the meter to change the
amount or timing of energy consumption. Demand Response (DR) is a subset of Demand Side
Management. It usually refers to a set of activities to reduce or shift electricity use to improve electric grid
reliability, manage electricity costs, and ensure that customers receive signals that encourage load reduction
during times when the electricity grid is near its capacity. Emergency Load Response programs are
interventions aimed at avoiding shortfalls in energy supply. Usually, the Transmission System Operator
(TSO) offers remuneration to particular categories of consumers amenable to planned and unplanned
interruptions to their energy supply in order to prevent critical situations in network operations. Demand Side
Bidding (DSB) is a mechanism that enables consumers, either directly or through a broker, to participate in
the electricity market or in the operation of the system through offers that cause changes in their normal
consumption profile.”2Case:South Africa has introduced a Standard Offer (SO) comparable to a Feed-in
Tariff (FiT), in that the contract compensates the customer for a pre-determined level of kWH saved (or load
curtailed). ESKOM is using this mechanism to address capacity issues. Interruptible rates could be viewed
as a tariff substitute for this instrument.Case: In Egypt, one load shedding agreement for 160 MW is in place
between the TSO and a large fertilizer company. The Egyptian regulatory authority is preparing a regulatory
framework for interruptible contracts, including rules for load shifting, peak shaving, planning of regular and
annual maintenance.3
3. Improvements in System Reliability: A utility system that has frequent outages (or rations electricity by
limiting service to particular localities—rolling blackouts) causes users to seek alternative sources of energy.
Industrial customers can turn to self-generation and residential customers to other (less clean) sources of
energy. Self-generation generally means that the industrial or commercial user is unable to take advantage
of scale economies (so the cost of the reliability is high). Also, these small units are often far less
Specific Energy Efficiency Policies
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environmentally benign than those available to the utility. Thus, regulators can promote clean energy and
energy efficiency through incentives that promote improvements in service quality (targeting reliability and
voltage stability). For systems that are not subject to regular power outages, further improvements in
reliability will not have significant energy efficiency impacts, so improvements should only be based on the
valuation customers place on reliability.
4. Regulation of metering and billing and other information provided to consumers regarding their
consumption:“Energy utilities are generally required to provide information to their existing and potential
customers in order to increase their awareness of energy consumption. Such information can include the
level of consumption, articulated among different aggregations of hours—in some cases compared with
historic consumption, the contemporaneous level of prices or tariffs, and other aspects such as the quantum
of greenhouse gases emissions caused by a specific level of energy consumption. This kind of information
can be provided to consumers primarily through three channels: through metering, in bills, in displays
associated with smart meters and through on-line data access.”4For developing countries, bills to residential
customers represent the primary communication channel to this group—so it becomes important that utilities
design a format and select information and effective messages that are consistent with education levels and
cultural norms.Case: The Electricity Regulatory Commission of Jordan is introducing a time-of-use pricing
regime under which it will provide each consumer with two bills, one of which is based on a flat tariff with
the second based on a time-of-use tariff for its energy consumption. In Egypt, a marketing campaign on
electricity bills has been carried out to encourage consumers to use compact fluorescent light bulbs (CFL).5
5. Promote Utility Energy Audits: Utilities are in a position to analyze bills and conduct on-premise energy
audits to identify areas of saving. Depending on the EE law, regulators could require utilities to undertake
costly audit programs; the savings on electricity bills could be shared with the utility—until the audit outlays
are recovered. If the audit leads to customer outlays, then customer costs also need to be recovered in the
sharing plan for allocating bill savings from investments.6The long term impact of effective programs is to
delay the construction of new generating units. However, for a utility that is not rationing electricity, if price is
greater than marginal operating cost, demand reductions represent lost net revenue. Regulators need to
recognize the potential conflicts that can arise from such outcomes. Thus, the energy audit process could be
outsourced to ESCOs.Case: In Algeria, mandatory audits have been established for the industrial, tertiary
and transport sectors, requiring reporting, preparation of action plans and the appointment of energy
managers. Compulsory energy audits are also in place in Tunisia, with a 5 year cycle, for operations
consuming more than 1.000 TOE (ton oil equivalent) in industry and more than 500 TOE in both the tertiary
and transport sectors.7 The sector regulator is in a position to monitor the impacts of subsidies covering 20-
50% of EE expenditures, but the program is carried out by a specialized agency: Agence Nationale pour la
Maitrise de l’Energie (ANME).
6. Incentivize smart grids:A high tech approach to improving operations and the customer interface
involves smart meters and information systems that enable the utility to track system performance in real
time. The costs of implementing such systems need to be balanced against the benefits, including the
possibility that outlays on other projects might be much more cost effective, particularly in the context of a
developing country.Case: In Saudi Arabia, a program for the installation of remotely readable smart meters
is under way for commercial and industrial customers and it is planned to be gradually extended to all
customers.8
These strategies for promoting energy efficiency can improve system operations and are central to a sector
regulator’s mission to improve sector performance.
Note that the State might develop grants, subsidies and tax incentives for energy efficiency investments, but
these are not generally instruments available to regulators. Similarly, public information campaigns, adding EE to
school curricula, developing appliance labeling systems, and creating certification programs for buildings are
outside typical regulatory responsibilities.
Regulatory Review of Utility Energy Efficiency Programs
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We conclude with some observations about the regulatory review of utilities that provide EE programs. Attention
should be given to the strengths and limitations of utilities. The IEA Handbook identifies the advantages and
disadvantages of energy providers delivering EE Programs:
Advantages of Utilities:
ready access to capital (although some state-owned utilities are capital-starved, due to pricing below cost);
an existing relationship with end users, including billing systems and market data;
a familiar brand name (which may not be an advantage if performance has been weak in the past—
reputations are difficult to change);
a widespread service and delivery network within their jurisdiction;
responsible for anticipating and accommodating energy and peak demand growth.
Disadvantages of Utilities:
overlap in commercial and societal interests may be small;
potential disincentive to incur costs, increase prices or reduce sales.
State-owned and privately-owned utilities may place different weights on the bottom line (or the return on
investment), but managers for both types of service providers will need to be brought into discussions of
alternative programs early in the process. Of course, regulators need to ask whether utilities they are monitoring
have the capacity to successfully implement EE programs and projects. If utilities have little experience in the
field, then “starting small” makes sense, so that the utility’s capacity to implement programs grows over time.
The IEA Handbook (Box 12) identifies nine key points for ensuring effective EE through utilities:
1. Use clear criteria for considering whether energy providers should act as EE implementers.
2. Utilities can be particularly effective when delivering EE that has resource value.
3. Government or regulators must establish the conditions that enable utilities to implement EE.
4. Downstream utilities may be better positioned to deliver energy efficiency.
5. Avoid complexity and simplify procedures whenever possible.
6. Take advantage of the commercial acumen of utilities (where it exists), within a portfolio framework.
7. Maintain oversight arrangements to guarantee the cost-effectiveness of results.
8. Apportion institutional responsibilities to governmental and regulatory actors.
9. Consider System Public Benefit or Wires Charges, as these are an effective way to fund energy
efficiency, regardless of who implements the programs.
Given the appropriate legal enabling framework (driven by national objectives), the benefits and costs of EE
policies can be estimated by infrastructure professionals. Nations have a wide range of options for addressing
EE issues. It is up to the regulator to provide input into the policy-making process and then to implement
national policies in ways that improve sector performance.
1. “White Certificates: Concept and Market Experiences” EuroWhiteCert Project, www.eurowhitecert.org .
The write-up lists fourteen issues that would need to be addressed in such a system and describes the
experience in six European nations.
2. ICER pg. 35
3. ICER pg. 142
4. ICER pg. 33
5. ICER pg. 121
6. “Energy audit allows a systematic approach for decision-making in the area of energy management and
represents an effective tool in defining and pursuing comprehensive energy management program. Audits
are scalable, and can be applied to large and small users, domestic and business. Audits consists of the
verification, monitoring and analysis of energy use, including submission of technical reports containing
recommendations for improving energy efficiency, based on cost-benefit analysis, and an action plan to
implement them. The audit is aimed at identifying all of the energy streams present in a facility and
quantifying energy usage according to its discrete functions. The audit facilitates subsequent measures that
Footnotes
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can be undertaken, including the reduction of energy consumption, fuel switching, and load management.”
ICER pg. 32
7. ICER pg. 97
8. ICER pg. 135
IEA Energy Efficiency Governance Handbook (2010).
International Confederation of Utility Regulators (2010), A Description of Current Regulatory Practices for the
Promotion of Energy Efficiency, (June 21), 1-180.
Eto, W. H.and Golove W.H. (March 1996). Market Barriers to Energy Efficiency: ACritical Reappraisal of the
Rationale for Public Policies to Promote Energy Efficiency. Energy & Environment Division Lawrence Berkeley
National LaboratoryUniversity of California Berkeley, California 94720.
Taylor R.P, Govindarajalu C., Levin J., Meyer A.S., Ward W. A. (2008). Financing Energy Efficiency: Lessons
from Brazil, China India and Beyond. Washington DC: The International Bank for Reconstruction and
Development / The World Bank.
“White Certificates: Concept and Market Experiences” EuroWhiteCert Project, http://www.eurowhitecert.org , 1-6.
Hansen, Shirley J., Pierre Langlois, Paolo Bertoldi (2009), ESCOs Around the World: Lessons Learned in 49
Countries, Fairmont Press, viii-377.
References
Other References
Related Questions
Renewable Energy and Energy Efficiency
http://regulationbodyofknowledge.org/faq/renewable-energy-and-energy-efficiency/[17/01/13 9:31:35 PM]
Frequently Asked Questions -> Renewable Energy and Energy Efficiency
What should be the involvement and mandate of the energy regulator in connection with promotion of Renewable Energy and what are the main challenges
associated from a regulatory perspective?
What should be the involvement and mandate of the energy regulator in connection with promotion of Energy Efficiency and what are the main challenges
associated from a regulatory perspective?
What is the best choice of regulatory instruments/tools for Renewable Energy promotion based on efficiency and effectiveness of reaching policy targets (FiT
versus Green Certificates versus Central Procurement and others)?
What is the best choice of regulatory instruments/tools for Energy Efficiency promotion based on efficiency and effectiveness of reaching policy targets? (Energy
Efficiency Certificates versus Central Procurement and others)
Renewable Energy and Energy Efficiency
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Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
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State-Owned Enterprises
http://regulationbodyofknowledge.org/faq/state-owned-enterprises/[17/01/13 9:32:24 PM]
In what ways, if any, should
regulators treat SOEs
differently than investor-
owned infrastructure
operators?
What issues must be
addressed by institutional
structures to promote good
governance for a SOE?
Should social objectives be
met through funds obtained at
the national level and
allocated to meet the
objectives in each sector and
region?
What is Corporatization?
What is Commercialization?
Since many SOEs in
developing countries are
inefficient and thrive on
patronage, in what ways might
commercialization of SOEs
improve financial (and
operating) performance?
Governance: What
governance procedures
promote strong performance
in SOEs?
Funding investments: In what
ways does privatization help
meet the challenges of
funding network expansion?
To what extent does public
ownership help meet the
challenges of funding network
expansion?
ROI: What is the appropriate
Return on Investment for a
SOE?
In what ways, if any, should regulators treat SOEs differently than investor-owned infrastructure operators?
What issues must be addressed by institutional structures to promote good governance for a SOE?
Should social objectives be met through funds obtained at the national level and allocated to meet the
objectives in each sector and region?
What is Corporatization?
What is Commercialization?
Since many SOEs in developing countries are inefficient and thrive on patronage, in what ways might
commercialization of SOEs improve financial (and operating) performance?
Governance: What governance procedures promote strong performance in SOEs?
Funding investments: In what ways does privatization help meet the challenges of funding network
expansion? To what extent does public ownership help meet the challenges of funding network expansion?
ROI: What is the appropriate Return on Investment for a SOE?
Incentive Regulation: What are strategies for regulating state-owned enterprises with their unique
information issues and strong links to government ministries?
Privatization: What is the role of a regulator (if any) in a privatization transaction?
State-Owned Enterprises Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
State-Owned Enterprises
http://regulationbodyofknowledge.org/faq/state-owned-enterprises/[17/01/13 9:32:24 PM]
Incentive Regulation: What
are strategies for regulating
state-owned enterprises with
their unique information issues
and strong links to
government ministries?
Privatization: What is the role
of a regulator (if any) in a
privatization transaction?
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Utility Market Reforms
http://regulationbodyofknowledge.org/general-concepts/utility-market-reforms/[17/01/13 9:33:42 PM]
Utility Market Reforms
Development of Regulation
Market Structure and
Performance
Regulating Public vs. Private
Operators
Theories of Regulation
Concluding Observations
Related FAQs
Annotated Reading List
You're in the section: Foundations of Regulation -> Utility Market Reforms
In the early and mid twentieth century many countries, especially in the developing world, sought to provide
utility services by forming state-owned monopolies. By the latter part of the century, it became clear that state-
owned monopolies were generally inefficient providers of utility services and ineffective in making these services
broadly available to the public.
Micro-management from politically-motivated government officials led state-owned operators to have excessive
numbers of employees, provide service primarily to politically powerful groups, cross-subsidize services, and
charge non-commercially-viable prices.
Weak institutions allowed two types of political opportunism. In some instances, prices were kept artificially low
so that state-owned operators needed government subsidies to finance investments and cover other costs. If
fiscal constraints prevented the government from providing the subsidies consistently, then there was under
investment and poor service quality. In other instances, the utility services would be used as cash cows to fund
other government functions. This also resulted in under investment and poor service quality for the utility
services.
During the 1980s and 1990s, policy makers began to conclude that regulated, privately-owned service providers
might be more effective than state-owned operators because private operators might be less subject to political
opportunism and might operate more efficiently than state-owned enterprises, especially if subjected to
competitive pressures, because profit motives provide clear and consistent incentives to control costs, deploy
infrastructure where demand is sufficient to cover costs, offer prices that encourage efficient utilization of the
infrastructure, and innovate when customers find the innovation sufficiently valuable to pay for the
improvement.1 As part of this trend, countries began to introduce competition wherever possible and developed
utility regulatory agencies that would enforce concession or licensing agreements and regulate prices.2
The shape of market reform has varied across sectors and countries. In telecommunications, liberalization and
privatization have been the most prevalent features of market reform, although countries have varied in their
degrees of market liberalization and privatization. Telecommunications regulators and policymakers have
generally focused on removing barriers to entry, ensuring efficient network interconnection,3 rebalancing prices4
to reflect new competitive realities, and promoting access to telecommunications for the poor and in rural
areas.5 In electricity, industry restructuring6 and commercialization (sometimes through privatization) have been
the most prevalent market reforms. Restructuring has sometimes involved structural separation that separates
the sector into competitive generating companies and monopoly transmission and distribution companies.
Establishing efficient market mechanisms for electricity has been particularly challenging. Markets for natural gas
have experienced reforms along the lines of some electricity reforms – production and transport are separated
from distribution, gas production has been opened to competition, and gas distribution is typically left to a local
monopoly. Water reforms have varied greatly, ranging from complete privatizations as in the case of the U.K., to
Utility Market Reforms Sections
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MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Utility Market Reforms
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build-operate-transfer arrangements, to private management contracts, to incentive systems for state-owned
monopolies.7
1. The references in the Rationale for Reform of Utility Markets section note these trends.
2. Monopoly and Market Power examines the regulation of monopolies. The Regulatory Instruments section
of the first chapter provides information on various regulatory instruments, such as license and concession
agreements, as does the Development, Review, and Appeal of Regulatory Rules and Decisions section.
3. Competition in Infrastructure Markets covers market liberalization, including barriers to entry and
interconnection.
4. Tariff Design covers tariff issues.
5. Economics of Alternative Price Structures and Pricing for the Poor cover issues of providing service to the
poor.
6. Competition in Infrastructure Markets covers approaches to market restructuring. Rationale for Reform of
Utility Markets in the first chapter examines the motives for restructuring.
7. Incentive mechanisms are covered in Price Level Regulation and Quality, Social, Environmental.
Footnotes
Development of Regulation
http://regulationbodyofknowledge.org/general-concepts/development-of-regulation/[17/01/13 9:34:19 PM]
Utility Market Reforms
Development of Regulation
Market Structure and
Performance
Regulating Public vs. Private
Operators
Theories of Regulation
Concluding Observations
Related FAQs
Annotated Reading List
You're in the section: Foundations of Regulation -> Development of Regulation
Countries almost always establish regulatory agencies to improve sector performance relative to no regulation.1
This means that the regulators generally focus on controlling market power and/or facilitating competition,
although regulators are also often charged with ensuring service availability and system expansion, improving
cost efficiency, attracting capital to the sector, improving sector stability, and generating government revenues
from licenses and concessions.2
Sector performance can be measured in terms of net consumer surplus, service availability and system
expansion, cost efficiency, affordability of prices, range of services offered, quality, and the rate of innovation.3
In fulfilling this purpose, regulators are often called upon to implement policies for attracting capital to the sector
and increasing investment, generating government revenues from licenses and concessions, encouraging the
development of and effectiveness of competition in the market, increasing government success in issuing
licenses, providing incentives for operators to improve efficiency, and facilitating universal access. Regulation
has failed when it has not provided the stability and commercially viable tariffs needed by investors.
Regulatory agencies vary in their scope of authority and responsibilities. The three main issues in defining a
utility regulator’s role are the sector(s) covered, the regulator’s role in relation to policy makers, and the
regulator’s role in relation to other regulatory entities such as the competition agency. Sometimes the regulatory
agency is sector specific, but multi-sector regulatory agencies are also popular. Typical duties include standard
setting, regulating prices and service quality,4 monitoring performance, licensing, handling consumer complaints,
providing policy advice to ministries and parliament, monitoring market competition, managing essential or
scarce resources,5 and settling industry disputes, such as inter-operator interconnection or payment disputes.6
Because private and public sector participation in infrastructure can take several forms, ranging from state
ownership to service and supply contracts to concession arrangements to full privatization, and because
countries have varied legal systems and institutional endowments, regulators vary in the type of regulatory
instruments they apply.7 Regulation of state-owned enterprises is reviewed below. Some countries issue
licenses that set out the regulatory conditions under which the operator will provide its service. Other countries
enter into contracts with operators, such as concession contracts or franchises.8 Service and supply contracts
include technical assistance contracts and complete management contracts. The government maintains
ownership of the assets. Concession approaches include leasing and build-operate-transfer arrangements in
which the private operator owns or is at least responsible for the assets for a set period of time. Privatization
includes divestiture by the government and the development of new enterprises, often called build-own-operate,
in which the private operator owns the assets until the operator chooses to retire or sell them.
Legislation may be needed to authorize the government to enter into service and supply contracts or to issue
licenses or let concessions, however, the terms included in the contracts, licenses, and concession agreements
govern the details of the private operators’ and the government’s rights and obligations. With privatization,
Development of Regulation Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Development of Regulation
http://regulationbodyofknowledge.org/general-concepts/development-of-regulation/[17/01/13 9:34:19 PM]
legislation oftentimes governs the parties’ rights and obligations, but these may be further defined in a license.
Regardless of the form of ownership, some countries rely primarily upon statutes and laws that define the roles
and responsibilities of all operators.
1. Rationale for Regulation covers the rationale for regulation. Regulatory Objectives and Priorities covers
regulatory objectives and priorities.
2. Common Roles of Regulators covers common roles for regulators. Regulatory Process examines agency
responsibilities and other issues in managing the regulatory process.
3. The possibility that the government may want to use regulation to favor particular political constituents will
be set aside for the moment.
4. Pricing is covered in Competition in Infrastructure Markets and Tariff Design. Service quality is covered in
Quality of Service.
5. Scarce or essential resources might include telephone numbering resources, radio spectrum, and
bottleneck facilities, such as monopoly distribution lines.
6. The Stakeholder Relation section notes handling consumer complaints, other relationships, and
negotiation, and the Institutional Design Issues section covers independence.
7. Regulation of Public vs. Private Companies, Existing vs. New Firms identifies special issues related to
regulation of state-owned enterprises and Options and Critiques for Private Participation in
Infrastructure summarizes regulatory instruments. Reviews and Appeals of Regulatory Decisions also
provides information on choices of regulatory instruments.
8. Competition for the Market covers techniques for contracting and franchising.
Footnotes
Market Structure and Performance
http://regulationbodyofknowledge.org/general-concepts/market-structure-performance/[17/01/13 9:34:56 PM]
Utility Market Reforms
Development of Regulation
Market Structure and
Performance
Regulating Public vs. Private
Operators
Theories of Regulation
Concluding Observations
Related FAQs
Annotated Reading List
You're in the section: Foundations of Regulation -> Market Structure and Performance
Market structure refers to the number of firms in a sector and the nature of their interactions. Governments
regulate market structure in various ways, including removing barriers to entry, restrictions on market
concentration, and restrictions on vertical integration. Governments may also regulate market conduct, which
includes controlling operators’ pricing and production practices or providing incentives for appropriate conduct.
Regulation of market conduct is traditionally viewed as a poor substitute for competition. As a result, regulators
often encourage competition whenever practicable. The advantages of competition over regulated conduct
include limited opportunities for political rent seeking, fewer information asymmetries, and better incentives to
serve customer interests. When an operator is subject to at least some competitive pressures, regulators
generally allow the operator pricing flexibility, ranging from deregulation to the opportunity to lower prices to long
run marginal cost.
Sometimes infrastructure regulators share responsibility for ensuring competitiveness of markets with a
competition regulator that is concerned with all sectors, but there are also instances where the regulator plays
the role of the competition regulator.2 The competition regulator generally has three functions. The first function
is to remedy anticompetitive conduct, such as collusion.3 This function is generally ex post, meaning that the
competition authority responds to activities that have already occurred. In contrast, utility regulators generally
address competitive issues ex ante, meaning that they act to prevent anticompetitive conduct. The second
function of the competition authority is to ensure that industry mergers do not significantly decrease competition.
The third function is consumer protection, such as enforcing warrantees and advertising claims. When sector
regulators and competition authorities are separate bodies, they often cooperate in their efforts.4
1. Regulation of Market Structure vs. Regulation of Conduct notes the regulation of market structure versus
the regulation of market conduct. Market Structure and Competition examines various market structures and
related regulatory issues.
2. See Competition in Infrastructure Markets, Institutional Design Issues, and Stakeholder Relations for
information on relationships with other agencies, such as competition authorities.
3. Competition in Infrastructure Markets examines anticompetitive conduct.
4. Stakeholder Relations notes approaches for regulators to relate with customers.
Market Structure and Performance
Footnotes
Sections
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MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Market Structure and Performance
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Regulating Public vs. Private Operators
http://regulationbodyofknowledge.org/general-concepts/regulating-public-versus-private-operators/[17/01/13 9:35:39 PM]
Utility Market Reforms
Development of Regulation
Market Structure and
Performance
Regulating Public vs. Private
Operators
Theories of Regulation
Concluding Observations
Related FAQs
Annotated Reading List
You're in the section: Foundations of Regulation -> Regulating Public vs. Private Operators
Whether the regulator is regulating a publicly-owned operator rather than a privately-owned operator changes
the nature of some issues. For example, government interference may be greater with a government-owned
operator. Direct control of a public enterprise may be less costly than direct control of a private operator.
However, direct control in either instance may lower operating efficiency for reasons indicated above. Also, a
government’s promise to not engage in political interference with utility operations is less credible with public
ownership than with private ownership.
Using financial incentives may be less effective for a state-owned provider than for a privately owned provider.
Using incentive regulation to motivate improved performance is effective for private operators whose profit
motives are clear. However, in the case of public enterprises the regulator must identify the objectives of the
managers who may be more affected by political influence, government budgeting, and bureaucratic
management than are their counterparts in privately-owned operators.2
Another financial incentive used by regulators is the levying of fines on operators for poor performance. These
are generally effective for private operators if enforced, but there is a serious question about whether fines are a
deterrent for public enterprises because it is the public that ultimately pays the penalty.
Ownership also affects other issues. Pricing is generally more efficient with private enterprises because the
government must allow private operators’ prices to cover costs over time in order to encourage investment.3
Competition is more complicated with public enterprises than with private enterprises. Public enterprises have
had success thwarting competitive entry, but experience has shown that subjecting public enterprises to
competition improves efficiency relative to public ownership with no competition.
Also, the absence of equity markets for public enterprises complicates estimating the cost of capital. On the
other side, the public sometimes raises concerns about private ownership of infrastructure industries, such as
concerns about private investment incentives not capturing public needs for services and about foreign owners
not understanding local markets and local needs.4
1. See Regulation of Public vs. Private Companies, of Existing vs. New Firms.
2. Price Level Regulation and Quality, Social, Environmental chapters cover these techniques.
3. See, for example, the case study of India electricity in Bakovic, Tenenbaum, and Woolf, March 2003.
4. Determination of Cost of Capital (Debt and Equity) covers issue of estimating the cost of capital.
Regulating Public vs. Private Operators
Footnotes
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Regulating Public vs. Private Operators
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Theories of Regulation
http://regulationbodyofknowledge.org/general-concepts/theories-of-regulation/[17/01/13 9:36:10 PM]
Utility Market Reforms
Development of Regulation
Market Structure and
Performance
Regulating Public vs. Private
Operators
Theories of Regulation
Concluding Observations
Related FAQs
Annotated Reading List
You're in the section: Foundations of Regulation -> Theories of Regulation
The development and techniques of regulations have long been the subject of academic research. Two basic
schools of thought have emerged on regulatory policy, namely, positive theories of regulation and normative
theories of regulation.
Positive theories of regulation examine why regulation occurs. These theories of regulation include theories of
market power,2 interest group theories that describe stakeholders’ interests in regulation,3 and theories of
government opportunism that describe why restrictions on government discretion may be necessary for the
sector to provide efficient services for customers.4 In general, the conclusions of these theories are that
regulation occurs because 1) the government is interested in overcoming information asymmetries with the
operator and in aligning the operator’s interest with the government’s interest,5 2) customers desire protection
from market power when competition is non-existent or ineffective, 3) operators desire protection from rivals, or
4) operators desire protection from government opportunism.
Normative theories of regulation generally conclude that regulators should encourage competition where
feasible, minimize the costs of information asymmetries by obtaining information and providing operators with
incentives to improve their performance,6 provide for price structures that improve economic efficiency,7 and
establish regulatory processes that provide for regulation under the law and independence, transparency,
predictability, legitimacy, and credibility for the regulatory system.8
Principal-agent theory addresses issues of information asymmetry, which in the context of utility regulation
generally means that the operator knows more about its abilities and effort and about the utility market than
does the regulator.9 In this literature, the government is the principal and the operator is the agent, whether the
operator is government owned or privately owned. Principle-agent theory is applied in incentive regulation and
multipart tariffs.10
1. See Rationale for Regulation and Regulatory Instruments.
2. Market Structure and Competition addresses market power issues.
3. Institutional Design Issues, Ethics, and Stakeholder Relations address issues relevant to the effects of
stakeholders in regulation.
4. Limits to regulatory power and institutional mechanisms designed to limit opportunism are examined in
the Regulatory Process chapter. Incentive regulation techniques reviewed in the Quality, Social,
Environmental chapter include restrictions on regulatory discretion that are intended to limit opportunism.
5. See Regulatory Instruments.
6. See Market Structure and Competition, Financial Analysis, and Price Level Regulation for techniques for
Theories of Regulation
Footnotes
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Theories of Regulation
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overcoming information asymmetries.
7. See Tariff Design.
8. See Regulatory Process.
9. See Regulatory Instruments. See Productivity Commission of Australia (2003) for a case study in how
information issues affect regulatory policy.
10. Price Level Regulation covers incentive regulation and Tariff Design notes multipart pricing.
Concluding Observations
http://regulationbodyofknowledge.org/general-concepts/concluding-observations/[17/01/13 9:36:43 PM]
Utility Market Reforms
Development of Regulation
Market Structure and
Performance
Regulating Public vs. Private
Operators
Theories of Regulation
Concluding Observations
Related FAQs
Annotated Reading List
You're in the section: Foundations of Regulation -> Concluding Observations
Even though regulation is often described as a principal-agent problem between the government and the
operator, there are actually several principal-agent relationships involved. The regulator is an agent for the
government, serving as the principal in the government’s principal-agent relationship with the operator. The
government seeks to control its regulator-agent through laws, courts, budget control, fixed terms, and
transparency requirements rather than through incentives. There is also a principal-agent relationship between
the customers, serving as the principal, and two agents, namely the government and the regulator. Customers
regulate the government and the regulator through political processes and regulatory processes reviewed in
Chapter VII.1
The following chapters describe numerous mechanisms of regulation. Chapter II covers the Market Structure
and Competition techniques. Chapter III examines Financial Analysis, which relates to both the information
gathering and incentive regulation solutions to the information asymmetry between the regulator and the
operator. It also covers additional information issues. Chapter IV focuses on using incentive regulation in
Regulating Overall Price Level and Chapter V covers the related Tariff Design issues. Chapter VI focuses on
Quality, Social, and Environmental Issues. Finally, Chapter VII examines the Regulatory Process, which is the
public’s main instrument for regulating the regulator.
1. See Regulatory Process for information regarding mechanisms used to address these principal-agent
relationships.
Concluding Observations
Footnotes
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Related FAQs
http://regulationbodyofknowledge.org/general-concepts/faqs/[17/01/13 9:37:16 PM]
Utility Market Reforms
Development of Regulation
Market Structure and
Performance
Regulating Public vs. Private
Operators
Theories of Regulation
Concluding Observations
Related FAQs
Annotated Reading List
What should regulators do to meet social objectives set by policy-makers?
What procedures should the regulator adopt in order to balance economic and social objectives (like
efficiency vs. fairness)?
In what ways, if any, should regulators treat SOEs differently than investor-owned infrastructure operators?
What issues must be addressed by institutional structures to promote good governance for a SOE?
What is Corporatization?
What is Commercialization?
Since many SOEs in developing countries are inefficient and thrive on patronage, in what ways might
commercialization of SOEs improve financial (and operating) performance?
Governance: What governance procedures promote strong performance in SOEs?
Funding investments: In what ways does privatization help meet the challenges of funding network
expansion? To what extent does public ownership help meet the challenges of funding network expansion?
Incentive Regulation: What are strategies for regulating state-owned enterprises with their unique
information issues and strong links to government ministries?
Privatization: What is the role of a regulator (if any) in a privatization transaction?
How should a regulator resolve disputes related to interconnection?
Related FAQs Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Annotated Reading List
http://regulationbodyofknowledge.org/general-concepts/references/[17/01/13 9:37:48 PM]
Rationale for Regulation,
Including Regulation of
Monopolies and Oversight of
Competitive Markets, Public
Interest Theory, Interest
Group Theory, and the
Difference Between Normative
and Positive Theories of
Regulation.
Rationale for Reform of Utility
Markets (e.g. Fiscal
Constraints, Technological
Change, Policy Innovations,
Incentives for Efficiency) and
the Elements of Market
Reform, Including Private
Participation, Liberalization,
and Regulation.
Common Roles of Regulators
Regulatory Objectives and
Priorities, Including Trade-Offs
in Objectives and Achieving
Balance in Pursuing
Objectives
Regulation of Market Structure
vs. Regulation of Conduct
Regulation of Public vs.
Private Companies, of Existing
vs. New Firms
Options and Critiques for
Private Participation In
Infrastructure
Regulatory Instruments
(Primary and Secondary
Legislation, Licenses,
Concessions)
Informational Asymmetry,
Limits to Regulation, and
Implications for Using
Core References Understanding Regulation: Theory, Strategy, and Practice New York: Oxford University Press,
1999. Baldwin, Robert, and Martin Cave Examines the rationale for regulation, including . [ Read more ... ]
Core References Private Participation in Infrastructure in Developing Countries: Trends, Impacts, and Policy
Lessons Washington, D.C.: World Bank, 2003. Harris, Clive Explains the rise and fall of. [ Read more ... ]
Note: Readers should cross-reference this section with Regulatory Objectives and Priorities on objectives and
priorities. Core References Managing the Regulatory Process: Design, Concepts, Issues, . [ Read more ... ]
Note: Readers should cross-reference this section with Common Roles of Regulators on roles of regulators.
Core References Managing the Regulatory Process: Design, Concepts, Issues, and the Latin Am. [ Read more
... ]
Core References Understanding Regulation: Theory, Strategy, and Practice New York: Oxford University Press,
1999, Chapters 4 and 16. Baldwin, Robert, and Martin Cave Describes basic regulatory str. [ Read more ... ]
Note: Readers should cross-reference this section with Market Structure and Competition, Financial Analysis,
Price Level Regulation and Regulatory Process for information on these issues as they rela. [ Read more ... ]
Note: Readers should cross-reference this section with chapters on Market Structure and Competition, Financial
Analysis, Pricing, and Regulatory Process for information on these issues as they relate . [ Read more ... ]
Core References Understanding Regulation: Theory, Strategy, and Practice New York: Oxford University Press,
1999, Chapter 4. Baldwin, Robert, and Martin Cave Describes basic regulatory strategies,. [ Read more ... ]
Core References Privatization, Restructuring, and Regulation of Network Industries Cambridge, MA: MIT Press,
1999, Chapter 2. Newbery, David M. Explains that the interaction between the regulator . [ Read more ... ]
Annotated Reading List for Foundations of RegulationRationale for Regulation, Including Regulation of Monopolies and Oversight of CompetitiveMarkets, Public Interest Theory, Interest Group Theory, and the Difference BetweenNormative and Positive Theories of Regulation.
Rationale for Reform of Utility Markets (e.g. Fiscal Constraints, Technological Change,Policy Innovations, Incentives for Efficiency) and the Elements of Market Reform,Including Private Participation, Liberalization, and Regulation.
Common Roles of Regulators
Regulatory Objectives and Priorities, Including Trade-Offs in Objectives and AchievingBalance in Pursuing Objectives
Regulation of Market Structure vs. Regulation of Conduct
Regulation of Public vs. Private Companies, of Existing vs. New Firms
Options and Critiques for Private Participation In Infrastructure
Regulatory Instruments (Primary and Secondary Legislation, Licenses, Concessions)
Informational Asymmetry, Limits to Regulation, and Implications for Using IncentivesVersus Command and Control
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Annotated Reading List
http://regulationbodyofknowledge.org/general-concepts/references/[17/01/13 9:37:48 PM]
Incentives Versus Command
and Control
Law and EconomicsCore References Judicial Corruption in Developing Countries: Its Causes and Economic Consequences
Berkeley Olin Program in Law & Economics, Working Paper Series, University of California, Berkel. [ Read more
... ]
Law and Economics
Rationale for Regulation, Including Regulation of Monopolies and Oversight of Competitive Markets, Public Interest Theory, Interest Group Theory, and the Difference Between Normative and Positive Theori...
http://regulationbodyofknowledge.org/general-concepts/references/rationale-for-regulation-monopolies-and-oversight-of-competition/[17/01/13 9:38:21 PM]
Rationale for Regulation,
Including Regulation of
Monopolies and Oversight of
Competitive Markets, Public
Interest Theory, Interest
Group Theory, and the
Difference Between Normative
and Positive Theories of
Regulation.
Rationale for Reform of Utility
Markets (e.g. Fiscal
Constraints, Technological
Change, Policy Innovations,
Incentives for Efficiency) and
the Elements of Market
Reform, Including Private
Participation, Liberalization,
and Regulation.
Common Roles of Regulators
Regulatory Objectives and
Priorities, Including Trade-Offs
in Objectives and Achieving
Balance in Pursuing
Objectives
Regulation of Market Structure
vs. Regulation of Conduct
Regulation of Public vs.
Private Companies, of Existing
vs. New Firms
Options and Critiques for
Private Participation In
Infrastructure
Regulatory Instruments
(Primary and Secondary
Legislation, Licenses,
Concessions)
Informational Asymmetry,
Limits to Regulation, and
Implications for Using
You're in the section: Foundations of Regulation -> Annotated Reading List -> Rationale for Regulation,
Including Regulation of Monopolies and Oversight of Competitive Markets, Public Interest Theory, Interest
Group Theory, and the Difference Between Normative and Positive Theories of Regulation.
Understanding Regulation: Theory, Strategy, and Practice
New York: Oxford University Press, 1999.
Baldwin, Robert, and Martin Cave
Examines the rationale for regulation, including issues of monopoly and market power, externalities,
information asymmetries, and public goods. Also summarizes positive theories of regulation, including
public interest theories, interest group theories, and private interest theories.
Managing the Regulatory Process: Design, Concepts, Issues, and the Latin America and Caribbean
Story
Washington, D.C.: The World Bank Group, 1999.
Guasch, J. Luis, and Pablo Spiller
Explains contracting issues that give rise to regulation, including problems of government commitments to
the operator, market failure, desire for cross subsidies, and interest group politics.
The Economics of Regulation: Principles and Institutions
Cambridge, MA: MIT Press, 1988, Reissue Edition, Chapter 1.
Kahn, Alfred
Explains common reasons cited for regulation, including the importance of the sector, the existence of
natural monopoly or market failure, the desire of government to use franchises or to encourage non
market-based outcomes (such as service distribution), problems with destructive competition or undesirable
discrimination, cream-skimming, and excessive non-price rivalry. Also describes the legal rationale for
regulation in the U.S.
Privatization, Restructuring, and Regulation of Network Industries
Cambridge, MA: MIT Press, 1999, Chapters 1 and 4.
Newbery, David M.
Describes normative and positive theories of regulation. Explains that “regulation … is inevitably inefficient
because of problems of information and commitment and, more fundamentally, because of inefficient
Rationale for Regulation, Including Regulation of Monopoliesand Oversight of Competitive Markets, Public InterestTheory, Interest Group Theory, and the Difference BetweenNormative and Positive Theories of Regulation.
Core References
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Rationale for Regulation, Including Regulation of Monopolies and Oversight of Competitive Markets, Public Interest Theory, Interest Group Theory, and the Difference Between Normative and Positive Theori...
http://regulationbodyofknowledge.org/general-concepts/references/rationale-for-regulation-monopolies-and-oversight-of-competition/[17/01/13 9:38:21 PM]
Incentives Versus Command
and Control
Law and Economics
bargaining between interest groups over potential utility rents.”
Reforming Power Markets in Developing Countries: What Have We Learned?
Energy and Mining Sector Board Discussion Paper No. 19. Washington, D.C.: World Bank, September 2006.
Besant-Jones, John E.
Describes motivations for electricity sector reform, the strategic decisions, and lessons from case studies.
Competition in the Natural Gas Industry: The emergence of spot, financial, and pipeline capacity
markets
Note no. 137 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, March 1998.
Juris, Andrej
Describes basic restructuring and trading arrangements in gas and pipeline markets.
ICT Regulation Toolkit
Washington, D.C.: infoDev and the International Telecommunications Union, 2007, Module 1.
Provides an overview of reasons for regulation of private telecommunications operators.
Telecommunications Reform – How to Succeed
in Public Policy for the Private Sector. Washington, D.C.: World Bank, October 1997.
Wellenius, Björn
Explains role of regulation in telecommunications reforms.
Best Methods of Railway Restructuring and Privatization
CFS Discussion Paper Series, number 11, World Bank, Washington, D.C., 1995.
Kopicki, Ron and Louis Thompson
Provides context and guidance to restructure the railways. Addresses distinct structural issues associated
with rail enterprise reform, design of specialized intermediary institutions that carry out much of the work of
railway restructuring, and management techniques that are appropriately adapted to railway reform and
restructuring. Focuses on “best” methods built on seven case studies of recent railway restructuring efforts:
Japan National Railway, New Zealand Railways, Argentina Railways, Swedish Railways, British Railways,
and railroads in the United States, and Canadian Railways.
Africa Infrastructure Country Diagnostic: Stuck in Traffic: Urban Transport in Africa
Working Paper number 44980, World Bank, Washington, D.C., 2008.
World Bank and Sub-Saharan Africa Transportation Project
Summarizes recent research on urban transport in 14 large African cities. Provides a comprehensive
overview of the state of urban transport in Africa, with a view to drawing out the main challenges facing
the sector and illustrating the different ways in which these have been addressed.
Privatization and Regulation of Transport Infrastructure: Guidelines for Policymakers and Regulators
World Bank Institute Development Study, World Bank, Washington, D.C., 2000.
Estache, Antonio
Addresses liberalization of transport policies and the role played by private operators and investors in
transport infrastructure. Provides an overview of why economic regulation is important and examines four
subsectors: airports, ports, railways, and roads. Discusses for each subsector: relevance from the
viewpoint of a regulator; main privatization and regulation trends; price and quality regulation issues that
characterize the sector, and performance indicators that the sector’s regulators should be able to rely on to
Sectoral ReferencesELECTRICITY
GAS
TELECOMMUNICATIONS
TRANSPORTATION
Rationale for Regulation, Including Regulation of Monopolies and Oversight of Competitive Markets, Public Interest Theory, Interest Group Theory, and the Difference Between Normative and Positive Theori...
http://regulationbodyofknowledge.org/general-concepts/references/rationale-for-regulation-monopolies-and-oversight-of-competition/[17/01/13 9:38:21 PM]
be effective in their jobs.
Public and Private Sector Roles in the Supply of Transport Infrastructure and Services
Transportation Paper Series number 1, World Bank, Washington, D. C., 2004.
Amos, Paul
Provides a framework for identifying and assessing the different models for public and private roles in the
transport sector. Highlights policy and regulatory issues which are important in judging the suitability of
different models; and summarizes the range of instruments available.
Water Toolkit Module 1: Selecting an Option for Private Sector Participation
Washington, D.C.: World Bank, 1997.
World Bank
Describes options for private sector participation in the provision of water services. Also gives a brief
overview of why some countries choose private participation.
Privatization, Regulation, Liberalization, Market Reform
Argentina: The Sequencing of Privatization and Regulation
in Regulations, Institutions, and Commitment: Comparative Studies in Telecommunications edited by Brian Levy
and Pablo T. Spiller. Cambridge, U.K: Cambridge University Press, 1996, pp. 202-249.
Hill, Alice, and Manuel Angel Abdala
WATER
Key Words
Case Studies
Rationale for Reform of Utility Markets (e.g. Fiscal Constraints, Technological Change, Policy Innovations, Incentives for Efficiency) and the Elements of Market Reform, Including Private Participation, Liber...
http://regulationbodyofknowledge.org/general-concepts/references/rationale-for-reform-of-utility-markets/[17/01/13 9:38:54 PM]
Rationale for Regulation,
Including Regulation of
Monopolies and Oversight of
Competitive Markets, Public
Interest Theory, Interest
Group Theory, and the
Difference Between Normative
and Positive Theories of
Regulation.
Rationale for Reform of Utility
Markets (e.g. Fiscal
Constraints, Technological
Change, Policy Innovations,
Incentives for Efficiency) and
the Elements of Market
Reform, Including Private
Participation, Liberalization,
and Regulation.
Common Roles of Regulators
Regulatory Objectives and
Priorities, Including Trade-Offs
in Objectives and Achieving
Balance in Pursuing
Objectives
Regulation of Market Structure
vs. Regulation of Conduct
Regulation of Public vs.
Private Companies, of Existing
vs. New Firms
Options and Critiques for
Private Participation In
Infrastructure
Regulatory Instruments
(Primary and Secondary
Legislation, Licenses,
Concessions)
Informational Asymmetry,
Limits to Regulation, and
Implications for Using
You're in the section: Foundations of Regulation -> Annotated Reading List -> Rationale for Reform of
Utility Markets (e.g. Fiscal Constraints, Technological Change, Policy Innovations, Incentives for
Efficiency) and the Elements of Market Reform, Including Private Participation, Liberalization, and
Regulation.
Private Participation in Infrastructure in Developing Countries: Trends, Impacts, and Policy Lessons
Washington, D.C.: World Bank, 2003.
Harris, Clive
Explains the rise and fall of both public sector monopolies and private participation in infrastructure.
Describes when private sector participation improves results and how important regulatory issues, such as
pricing and competition, need to be addressed if private participation in infrastructure is to succeed.
Back to the Future: The Potential in Infrastructure Privatization
Note no. 30 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 1994.
Klein, Michael, and Neil Roger
Describes the cycles of private and public provision of infrastructure. Examines role of regulation in
providing stability to the sectors.
Regulation and Development
Cambridge: Cambridge University Press, 2005.
Laffont, Jean-Jacques
Explains that the proper mode of provision of utility services can vary over time and depends on a
country’s political, cultural, and institutional features. Examines developing country context in depth.
Making Competition Work in Electricity
New York: Wiley & Sons, 2002.
Hunt, Sally
Describes reasons for restructuring electricity markets and the economics of the alternative industry
Rationale for Reform of Utility Markets (e.g. FiscalConstraints, Technological Change, Policy Innovations,Incentives for Efficiency) and the Elements of MarketReform, Including Private Participation, Liberalization, andRegulation.
Core References
Sectoral ReferencesELECTRICITY
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Rationale for Reform of Utility Markets (e.g. Fiscal Constraints, Technological Change, Policy Innovations, Incentives for Efficiency) and the Elements of Market Reform, Including Private Participation, Liber...
http://regulationbodyofknowledge.org/general-concepts/references/rationale-for-reform-of-utility-markets/[17/01/13 9:38:54 PM]
Incentives Versus Command
and Control
Law and Economics
structures.
Competition in the Natural Gas Industry: The emergence of spot, financial, and pipeline capacity
markets
Note no. 137 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, March 1998.
Juris, Andrej
Describes basic restructuring and trading arrangements in gas and pipeline markets.
ICT Regulation Toolkit
Washington, D.C.: infoDev and the International Telecommunications Union, 2007.
Provides an overview of reasons for regulation of private telecommunications operators.
What the Transformation of Telecom Markets Means for Regulation
Note no. 121 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 1997.
Smith, Peter
Examines the implications of dynamics of telecommunications technologies and markets for regulation.
Urban Bus Toolkit: Tools and Options for Reforming Urban Bus Systems
Public-Private Infrastructure Advisory Facility, World Bank.
CPCS Transcom
Toolkit designed to help government officials and policy makers evaluate existing and alternative urban bus
systems in developing and transitional countries. Offers practical advice to enact fundamental system
reforms.
Port Reform Toolkit, 2nd Edition
Public-Private Infrastructure Advisory Facility, World Bank.
World Bank Transport Group
Provides policymakers and practitioners guidance for undertaking sustainable and well-considered reforms
of public institutions that provide, direct, and regulate port services in developing countries.
Best Methods of Railway Restructuring and Privatization
CFS Discussion Paper Series, number 11, World Bank, Washington, D.C., 1995.
Kopicki, Ron and Louis Thompson
Provides context and guidance to restructure the railways. Addresses distinct structural issues associated
with rail enterprise reform, design of specialized intermediary institutions that carry out much of the work of
railway restructuring, and management techniques that are appropriately adapted to railway reform and
restructuring. Focuses on “best” methods built on seven case studies of recent railway restructuring efforts:
Japan National Railway, New Zealand Railways, Argentina Railways, Swedish Railways, British Railways,
and railroads in the United States, and Canadian Railways.
Privatization and Regulation of Transport Infrastructure: Guidelines for Policymakers and Regulators
World Bank Institute Development Study, World Bank, Washington, D.C., 2000.
Estache, Antonio
Addresses liberalization of transport policies and the role played by private operators and investors in
transport infrastructure. Provides an overview of why economic regulation is important and examines four
subsectors: airports, ports, railways, and roads. Discusses for each subsector: relevance from the
viewpoint of a regulator; main privatization and regulation trends; price and quality regulation issues that
characterize the sector, and performance indicators that the sector’s regulators should be able to rely on to
GAS
TELECOMMUNICATIONS
TRANSPORTATION
Rationale for Reform of Utility Markets (e.g. Fiscal Constraints, Technological Change, Policy Innovations, Incentives for Efficiency) and the Elements of Market Reform, Including Private Participation, Liber...
http://regulationbodyofknowledge.org/general-concepts/references/rationale-for-reform-of-utility-markets/[17/01/13 9:38:54 PM]
be effective in their jobs.
Regulating Water Services: Sending the Right Signals to Utilities in Chile
Note no. 286. March 2005.
Bitran, Gabriel, and Pamela Arellano
Examines how during the 1980s and 1990s the Chilean water and sanitation sector underwent deep
reforms so that private capital could finance the huge investments needed to achieve universal service.
Investigates key features of the new regulatory scheme that contributed to the sustainability of the reforms:
a phased approach, an efficient pricing policy and methodology, and expert panels to deal with conflict
resolution.
Government Opportunism and the Provision of Water
in Spilled Water: Institutional Commitment in the Provision of Water Services, edited by William Savedoff and
Pablo Spiller. Washington, D.C.: Inter-American Development Bank, 1999.
Savedoff, William, and Pablo Spiller
Describes roles that regulation may play in decreasing government opportunism for both private operators
and public operators.
An Empirical Analysis of Competition, Privatization, and Regulation in Telecommunications Markets in
Africa and Latin America
Policy Research Working Paper 2136. Washington, D.C.: World Bank, May 1999.
Wallsten, Scott J
Examines the effects of telecommunications reforms in Africa and Latin America. Finds that privatization
and an independent regulator together improve sector performance. Privatization alone yields few benefits
and has some negative effects. Competition increases per capita number of mainlines, payphones, and
connection capacity, and decreases the price of local calls.
Market Reform, Competition, Regulation, Franchising, Cross-subsidization, Privatization.
Regulatory Reforms in India: Effectiveness, Efficiency, and Impacts
The Energy and Resources Institute, New Delhi, India, 2003.
Garg, A., M. Kabra, and R. Kacker
The Restructuring and Privatization of Electricity Distribution and Supply Business in Brazil: A Social
Cost-Benefit Analysis
Working Paper WP 0309, University of Cambridge, Department of Applied Economics, January 2003.
Mota, Raffaella Lisbôa
Redistributive Impact of Privatization and the Regulation of Utilities in Chile
Discussion Paper 2001/19, World Institute for Development Economics Research, United Nations University,
Helsinki, June 2001.
Paredes, Ricardo
Welfare Impacts of Electricity Generation Sector Reform in the Philippines
Working Paper WP 0316, Department of Applied Economics, University of Cambridge, 2003.
Toba, Natsuko
Social Impact of Privatization and the Regulation of Utilities in Peru
Discussion Paper 2001/17, World Institute for Development Economics Research, United Nations University,
WATER
Other References
Key Words
Case Studies
Rationale for Reform of Utility Markets (e.g. Fiscal Constraints, Technological Change, Policy Innovations, Incentives for Efficiency) and the Elements of Market Reform, Including Private Participation, Liber...
http://regulationbodyofknowledge.org/general-concepts/references/rationale-for-reform-of-utility-markets/[17/01/13 9:38:54 PM]
Helsinki, June 2001.
Torero, Maximo, and Albert Pasco-Font
Common Roles of Regulators
http://regulationbodyofknowledge.org/general-concepts/references/common-roles-of-regulators/[17/01/13 9:39:26 PM]
Rationale for Regulation,
Including Regulation of
Monopolies and Oversight of
Competitive Markets, Public
Interest Theory, Interest
Group Theory, and the
Difference Between Normative
and Positive Theories of
Regulation.
Rationale for Reform of Utility
Markets (e.g. Fiscal
Constraints, Technological
Change, Policy Innovations,
Incentives for Efficiency) and
the Elements of Market
Reform, Including Private
Participation, Liberalization,
and Regulation.
Common Roles of Regulators
Regulatory Objectives and
Priorities, Including Trade-Offs
in Objectives and Achieving
Balance in Pursuing
Objectives
Regulation of Market Structure
vs. Regulation of Conduct
Regulation of Public vs.
Private Companies, of Existing
vs. New Firms
Options and Critiques for
Private Participation In
Infrastructure
Regulatory Instruments
(Primary and Secondary
Legislation, Licenses,
Concessions)
Informational Asymmetry,
Limits to Regulation, and
Implications for Using
You're in the section: Foundations of Regulation -> Annotated Reading List -> Common Roles of
Regulators
Note: Readers should cross-reference this section with Regulatory Objectives and Priorities on objectives and
priorities.
Managing the Regulatory Process: Design, Concepts, Issues, and the Latin America and Caribbean
Story
Washington, D.C.: The World Bank Group, 1999, Chapters 2 and 3.
Guasch, J. Luis, and Pablo Spiller
Describes the design of regulatory agencies and relates the design to the reasons for regulation. Provides
a case study of Jamaica.
The Economics of Regulation: Principles and Institutions
Cambridge, MA: MIT Press, 1988, Reissue Edition, Chapter 2.
Kahn, Alfred
Describes the basic economic functions of the utility regulator, focusing primarily on service quality,
controlling the overall price level, and determining rate structure.
Utility Regulators: Roles and Responsibilities.
Note no. 128 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 1997.
Smith, Warrick
Examines issues of sector coverage, relationships with ministers, and relationships with other government
agencies.
Strengthening of the Institutional and Regulatory Structure of the Brazilian Power Sector
World Bank Report on the PPIAF Project for Brazil Power Sector, Task 4, Washington, D.C., December 2002.
Brown, Ashley C., and De Paula, Ericson
Examines regulatory roles in granting concessions, conducting auctions, and sector planning. Roles in
auctions include setting the terms and conditions and ensuring that auctions are conducted fairly and
transparently. Describes potential conflicts of interest in having regulators involved in concessions and
auctions. Also describes key considerations in deciding whether regulators should have roles in sector
planning.
Designing Next Generation Telecom Regulation: ICT Convergence or Multisector Utility?
Common Roles of Regulators
Core References
Sectoral ReferencesELECTRICITY
TELECOMMUNICATIONS
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Common Roles of Regulators
http://regulationbodyofknowledge.org/general-concepts/references/common-roles-of-regulators/[17/01/13 9:39:26 PM]
Incentives Versus Command
and Control
Law and Economics
Center for Information and Communication Technologies, Technical University of Denmark, Lyngby, January
2003.
Henten, Anders, Rohan Samarajiva, and William H. Melody
Examines how convergence raises new regulatory issues such as security, privacy and consumer
protection. It may also lead to the integration of telecom and broadcast media regulation. Also examines
advantages and disadvantages of multi-sector regulators.
Telecommunications Regulations: Institutional Structures and Responsibilities
Working Paper no. 237, Organization for Economic Co-operation and Development (OECD), Washington, D.C.,
26 May 2000.
Min, Wonki
Explains that there is a lot of variety among nations on the roles of regulators. Typical responsibilities of
the regulator (or ministry) include licensing, interconnection, spectrum management, numbering, price
regulation, universal service, and service quality.
Telecommunications Legislation in Transitional and Developing Economies
World Bank Technical Paper No. 489, October 2000.
Schwarz, Tim, and David Satola
Examines the design of telecommunications legislation in transitional and developing economies for
liberalizing and privatizing telecommunications. Provides a framework for debate on a policy level about a
variety of issues. Also examines international best practice.
Case Studies: Private Sector Participation in Infrastructure in Uganda, Ghana, and Nigeria
Working Paper number 44, African Development Bank, Washington, D.C., 2004.
Ayogu, Melvin D.
Finds that Governments can be slow to admit private participation in infrastructure even with good
evidence that involving the private sector is welfare improving. Pressure to dislodge bureaucrats and
involve more private participation must be sustained. Also argues that an ideal regulatory regime is one
that evolves into a buffer between operators and government, ensuring that operators conform to economic
and social objectives, resolves disputes between competitors and between consumers and operators, as
well as monitors changing industry conditions. The more activities that reside in the private sector, the
better the prospects that the regulator would be unhampered by political interference.
The Theory of Access Pricing
Policy, Research Working Paper 2097, World Bank, Washington, D.C., 1999.
Valletti, Tommaso and Antonio Estache
Discusses access pricing which is an important component of a regulatory environment guaranteeing that
competitors have access to the services of potential “bottleneck” facilities too costly to duplicate. Rules
covering fair access to these facilities – including fair access prices - generally improve economic
efficiency by easing competition in markets both upstream and downstream from the bottleneck.
Appropriate access pricing rules are especially needed when a dominant firm controls the supply of one or
more inputs – for example, gas transportation, electricity transmission, local telecommunication access, or
railway track — vital for its competitors.
Privatization and Regulation of Transport Infrastructure: Guidelines for Policymakers and Regulators
World Bank Institute Development Study, World Bank, Washington, D.C., 2000.
Estache, Antonio
Addresses liberalization of transport policies and the role played by private operators and investors in
transport infrastructure. Provides an overview of why economic regulation is important and examines four
subsectors: airports, ports, railways, and roads. Discusses for each subsector: relevance from the
viewpoint of a regulator; main privatization and regulation trends; price and quality regulation issues that
characterize the sector, and performance indicators that the sector’s regulators should be able to rely on to
TRANSPORTATION
Common Roles of Regulators
http://regulationbodyofknowledge.org/general-concepts/references/common-roles-of-regulators/[17/01/13 9:39:26 PM]
be effective in their jobs.
Public and Private Sector Roles in the Supply of Transport Infrastructure and Services
Transportation Paper Series number 1, World Bank, Washington, D. C., 2004.
Amos, Paul
Provides a framework for identifying and assessing the different models for public and private roles in the
transport sector. Highlights policy and regulatory issues which are important in judging the suitability of
different models; and summarizes the range of instruments available.
A Primer on Efficiency Measurement for Utilities and Transport Regulators
Washington, D.C.: World Bank Group, 2003.
Coelli, Tim, Antonio Estache, Sergio Perelman, and Lourdes Trujillo
Provides an overview of the techniques offered to regulators of recently “privatized” utilities and transport
services. Designed as a starter kit, it surveys the options available and provides guidelines as to how to
chose between these options, identifying the costs and benefits of the various approaches in situations
most relevant to regulators. Covers the measurement of efficiency in the context of a tariff revision aiming
at redistributing at least some of the efficiency gains from the producers to the users. Also addresses the
challenges from comparative efficiency assessments allowing the introduction of yardstick competition.
The Role of the Regulator
2002.
OFWAT
Describes Ofwat’s roles and practices in the U.K.
The Road to Serfdom
Chicago: University of Chicago Press, 1944 (reprinted 1994).
Hayek, F.A.
Explains how expert agencies necessarily apply their value systems in carrying out their responsibilities.
Regulation, Regulatory agencies, Service quality, Rates, Prices, Planning
Regulatory Reforms in India: Effectiveness, Efficiency, and Impacts
The Energy and Resources Institute, New Delhi, India, 2003.
Garg, A., M. Kabra, and R. Kacker
WATER
Other References
Key Words
Case Studies
Regulatory Objectives and Priorities, Including Trade-Offs in Objectives and Achieving Balance in Pursuing Objectives
http://regulationbodyofknowledge.org/general-concepts/references/regulatory-objectives-and-priorities/[17/01/13 9:40:01 PM]
Rationale for Regulation,
Including Regulation of
Monopolies and Oversight of
Competitive Markets, Public
Interest Theory, Interest
Group Theory, and the
Difference Between Normative
and Positive Theories of
Regulation.
Rationale for Reform of Utility
Markets (e.g. Fiscal
Constraints, Technological
Change, Policy Innovations,
Incentives for Efficiency) and
the Elements of Market
Reform, Including Private
Participation, Liberalization,
and Regulation.
Common Roles of Regulators
Regulatory Objectives and
Priorities, Including Trade-Offs
in Objectives and Achieving
Balance in Pursuing
Objectives
Regulation of Market Structure
vs. Regulation of Conduct
Regulation of Public vs.
Private Companies, of Existing
vs. New Firms
Options and Critiques for
Private Participation In
Infrastructure
Regulatory Instruments
(Primary and Secondary
Legislation, Licenses,
Concessions)
Informational Asymmetry,
Limits to Regulation, and
Implications for Using
You're in the section: Foundations of Regulation -> Annotated Reading List -> Regulatory Objectives and
Priorities, Including Trade-Offs in Objectives and Achieving Balance in Pursuing Objectives
Note: Readers should cross-reference this section with Common Roles of Regulators on roles of regulators.
Managing the Regulatory Process: Design, Concepts, Issues, and the Latin America and Caribbean Story
Washington, D.C.: The World Bank Group, 1999, Chapters 2 and 16.
Guasch, J. Luis, and Pablo Spiller
Describes the design of regulatory agencies and relates the design to the reasons for regulation.
Summarizes lessons in regulatory design.
Some Options for Improving the Governance of State-Owned Electricity Utilities
The World Bank, Discussion Paper No. 11, February 2004.
Irwin, T. and C. Yamamoto
Improving performance of government-owned electricity utilities rests on the development of rules and
practices that reduce politicians’ willingness or ability to use the utilities for political purposes and pressures
utilities to improve performance. Focuses on the relationship between the company and the government as
its owner.
The Economics of Regulation: Principles and Institutions
Cambridge, MA: MIT Press, 1988, Reissue Edition, Chapters 1 and 2.
Kahn, Alfred
Explains the traditional reasons for regulation. Describes the basic economic functions of the utility
regulator, focusing primarily on service quality, controlling the overall price level, and determining rate
structure.
Regional Electricity Regulatory Principles
Mwenechanya, Jorry
Assesses the regulatory practices in southern Africa and recommends principles and strategies for
promoting investment.
Privatization, Restructuring, and Regulation of Network Industries
Cambridge, MA: MIT Press, 1999, Chapter 6.
Newbery, David M.
Regulatory Objectives and Priorities, Including Trade-Offs inObjectives and Achieving Balance in Pursuing Objectives
Core References
Sectoral ReferencesELECTRICITY
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Regulatory Objectives and Priorities, Including Trade-Offs in Objectives and Achieving Balance in Pursuing Objectives
http://regulationbodyofknowledge.org/general-concepts/references/regulatory-objectives-and-priorities/[17/01/13 9:40:01 PM]
Incentives Versus Command
and Control
Law and Economics
Describes the goals and objectives of electricity regulation and electricity market reform. Summarizes U.K.
case of electricity reform.
Regulatory Reform: Economic Analysis and British Experience
Cambridge, MA: The MIT Press, 1999, Chapter 8.
Armstrong, Mark, Simon Cowan, and John Vickers
Describes the goals and objectives of gas regulation and gas market reform. Summarizes U.K. case of gas
reform.
Regulatory Reform: Economic Analysis and British Experience
Cambridge, MA: The MIT Press, 1999, Chapter 7.
Armstrong, Mark, Simon Cowan, and John Vickers
Describes the goals and objectives of telecommunications regulation and telecommunications market
reform. Summarizes U.K. case of telecommunications market reform.
Vision and Balance
Government of Canada, 2001.
Report of the Canada Transportation Act Review Panel.
Describes the context for transportation regulation and how it has changed since 1961. The principle of
competition between modes became a cornerstone of the policy. Current policy involves tradeoffs of
commercialization and decentralization, with a shift toward a more commercial approach and a reduction in
subsidies.
Toolkit on Public-Private Partnerships in Highways
Public-Private Infrastructure Advisory Facility, World Bank.
Groupe Egis and Courdert Brothers
Provides policy makers from low- and middle- income countries guidance in the design and implementation
of Public-Private Partnerships in the highway sector. Covers all types of road projects and both with and
without private funding.
Port Reform Toolkit, 2nd Edition
Public-Private Infrastructure Advisory Facility, World Bank.
World Bank Transport Group
Provides policymakers and practitioners guidance for undertaking sustainable and well-considered reforms
of public institutions that provide, direct, and regulate port services in developing countries.
Africa Infrastructure Country Diagnostic: Stuck in Traffic: Urban Transport in Africa
Working Paper number 44980, World Bank, Washington, D.C., 2008.
World Bank and Sub-Saharan Africa Transportation Project
Summarizes recent research on urban transport in 14 large African cities. Provides a comprehensive
overview of the state of urban transport in Africa, with a view to drawing out the main challenges facing
the sector and illustrating the different ways in which these have been addressed.
Scoping Study – Urban Mobility in Three Cities: Addis Ababa, Dar es Salaam, and Nairobi
Sub-Saharan Africa Transport Program Working Paper, number 70, World Bank, Washington, D.C., 2002.
World Bank
Reports the results of a study of urban mobility in three Sub-Saharan African cities – Addis Ababa,
Ethiopia; Nairobi, Kenya; and, Dar-es-Salaam, Tanzania. A major impediment is poor institutional
structures and, consequently, a lack of leadership. Concludes that the only way to derive significant
improvements in the performance of the urban transport sector, is to reorganize the way in which urban
transport is planned, and developed.
GAS
TELECOMMUNICATIONS
TRANSPORTATION
Regulatory Objectives and Priorities, Including Trade-Offs in Objectives and Achieving Balance in Pursuing Objectives
http://regulationbodyofknowledge.org/general-concepts/references/regulatory-objectives-and-priorities/[17/01/13 9:40:01 PM]
Cities Awash: A Synthesis of the Country Cases
in Thirsting for Efficiency, edited by Mary M. Shirley. Washington, D.C.: The World Bank, 2002, pp.1-41.
Shirley, Mary M., and Claude Ménard
Describes the major issues facing water regulators and water sector reformers. Identifies lessons from a
series of case studies.
Bargaining, Information, Monopoly, Negotiation, Competition, Efficiency, Fairness, Objectives
Final Determinations. Future Water and Sewerage Charges 2000-05: Periodic Review 1999
November 1999.
OFWAT
Ofwat Annual Report 2003-2004
2004.
OFWAT
WATER
Key Words
Case Studies
Regulation of Market Structure vs. Regulation of Conduct
http://regulationbodyofknowledge.org/general-concepts/references/regulation-of-market-structure-versus-regulation-of-conduct/[17/01/13 9:40:37 PM]
Rationale for Regulation,
Including Regulation of
Monopolies and Oversight of
Competitive Markets, Public
Interest Theory, Interest
Group Theory, and the
Difference Between Normative
and Positive Theories of
Regulation.
Rationale for Reform of Utility
Markets (e.g. Fiscal
Constraints, Technological
Change, Policy Innovations,
Incentives for Efficiency) and
the Elements of Market
Reform, Including Private
Participation, Liberalization,
and Regulation.
Common Roles of Regulators
Regulatory Objectives and
Priorities, Including Trade-Offs
in Objectives and Achieving
Balance in Pursuing
Objectives
Regulation of Market Structure
vs. Regulation of Conduct
Regulation of Public vs.
Private Companies, of Existing
vs. New Firms
Options and Critiques for
Private Participation In
Infrastructure
Regulatory Instruments
(Primary and Secondary
Legislation, Licenses,
Concessions)
Informational Asymmetry,
Limits to Regulation, and
Implications for Using
You're in the section: Foundations of Regulation -> Annotated Reading List -> Regulation of Market
Structure vs. Regulation of Conduct
Understanding Regulation: Theory, Strategy, and Practice
New York: Oxford University Press, 1999, Chapters 4 and 16.
Baldwin, Robert, and Martin Cave
Describes basic regulatory strategies, such as command and control, self-regulation, incentive regulation,
and competition. Examines basic approaches that regulators use to facilitate competition.
Competition in Network Industries – Where and How to Introduce It.
Note no. 104 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 1997.
Klein, Michael, and Philip Gray
Explains concepts of competition for the market, competition over existing networks, and competition
among networks with practical examples. Describes various options for using competition in these sectors,
including franchising, open access, pooling, and timetabling. Explains that how network competition is
introduced and how effectively and easily it is implemented will vary from one network industry to another.
General rules for deciding where and how to introduce competition are discussed.
Back to the Future: The Potential in Infrastructure Privatization
Note no. 30 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 1994.
Klein, Michael, and Neil Roger
Describes problems of monopoly provision of utility services. Explains that competition can overcome some
of the institutional weaknesses that limit the effectiveness of regulation.
Making Competition Work in Electricity
New York: Wiley & Sons, 2002, Chapters 1-2.
Hunt, Sally
Argues that competition is more effective than regulated monopoly for efficiently providing services.
Competition assigns risks to shareholders while regulated monopoly assigns risks to customers. Technical
complexity of electricity industry needs to be understood before adopting reforms.
What the Transformation of Telecom Markets Means for Regulation
Note no. 121 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 1997.
Smith, Peter
Regulation of Market Structure vs. Regulation of Conduct
Core References
Sectoral ReferencesELECTRICITY
TELECOMMUNICATIONS
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Regulation of Market Structure vs. Regulation of Conduct
http://regulationbodyofknowledge.org/general-concepts/references/regulation-of-market-structure-versus-regulation-of-conduct/[17/01/13 9:40:37 PM]
Incentives Versus Command
and Control
Law and Economics
States that it is also becoming increasingly difficult to regulate telecommunications services separately due
to increased substitutability of goods across sectors and a convergence within industries. Governments are
finding it beneficial to use competition rather than regulation of conduct to improve sector performance.
Liberalization of the Philippine international air transport industry: que pasó? Competition policy is an
essential factor for successful liberalization of the airline industry in Philippines
Paper provided by Philippine Institute for Development Studies (PIDS), Philippines , 2001.
Austria, M.S.
Analyzes the liberalization and deregulation policy for the international air transport industry in the
Philippines. Examines the effects of these policies on competition and market structure, and identifies
areas where reforms are needed. Emphasizes the importance of the policy and recommends that
competition policy should focus on, among others: (1) market access; (2) access to inputs; and (3) mergers
and acquisitions.
Competition, Cross-subsidization, Privatization, Regulation
TRANSPORTATION
Key Words
Utility Regulation
http://regulationbodyofknowledge.org/glossary/u/utility-regulation/[17/01/13 9:41:08 PM]
Glossary -> U
See regulation.
Utility Regulation
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Regulation
http://regulationbodyofknowledge.org/glossary/r/regulation/[17/01/13 9:41:42 PM]
Glossary -> R
The process whereby the designated government authority provides oversight and establishes rules for firms in
an industry. Regulation places constraints on behavior, establishes good (or bad) incentives, and addresses
issues that are politically contentious. Decisions are implemented through a rule or order issued by an executive
authority or regulatory agency of a government and having the force of law.
Regulation
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Market Power
http://regulationbodyofknowledge.org/glossary/m/market-power/[17/01/13 9:42:15 PM]
Glossary -> M
The ability of a company to raise prices above the competitive level for a non-transitory time period. Generally,
such power is based on absence of close product substitutes, a low degree of competitive rivalry, or the
presence of entry barriers.
Market Power
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Competition
http://regulationbodyofknowledge.org/glossary/c/competition/[17/01/13 9:42:46 PM]
Glossary -> C
Competition tends to come in two varieties: competition among the few (a market with a small number of sellers
or buyers, such that each can exercise some degree of market power) and competition among the many
(Perfect competition–a market with so many buyers and sellers that none is able to influence the market price
or quantity exchanged).
Competition
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Investment
http://regulationbodyofknowledge.org/glossary/i/investment/[17/01/13 9:43:21 PM]
Glossary -> I
An item of value purchased for income or capital appreciation. Capital investments include equipment, pipes and
other fixed assets. Financial investments include stocks, bonds, and other securities.
Investment
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Market
http://regulationbodyofknowledge.org/glossary/m/market/[17/01/13 9:43:54 PM]
Glossary -> M
Collection of buyers and sellers that, through the forces of supply and demand, determine the price of a
product.
Market
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Operator
http://regulationbodyofknowledge.org/glossary/o/operator/[17/01/13 9:44:36 PM]
Glossary -> O
In the context of infrastructure networks, the operator is the enterprise responsible for ensuring service
availability and continuity. For example, in electricity, it would be the organization responsible for ensuring that
supply is in balance with demand. The word can also have a special meaning in telecommunications: a
telephone company employee who assists people with calling. The role is automated in many countries.
Operator
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Objectives
http://regulationbodyofknowledge.org/glossary/o/objectives/[17/01/13 9:45:09 PM]
Glossary -> O
Desired outcomes, such as efficiency, innovation, expanded services, and social justice. In the regulatory or
political context, citizens may have objectives for the regulatory or political process: such as transparency and
stakeholder participation. Broad economic and social objectives of citizens include freedom, equality, justice,
high living standards, and technological advancement. Political leaders attempt to discern (and shape) what
citizens want from infrastructure sectors. Social values may reflect a consensus or be deeply divisive and lead
to dramatic shifts in public policy. Events such as an energy crisis or a serious accident can also trigger changes
in public priorities and a willingness to move from the status quo.
Objectives
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Cash Flow
http://regulationbodyofknowledge.org/glossary/c/cash-flow/[17/01/13 9:45:42 PM]
Glossary -> C
A record of the money income received and money outflow for an organization over a given period of time.
Cash Flow
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Service Quality, Monitoring
http://regulationbodyofknowledge.org/glossary/s/service-quality-monitoring/[17/01/13 9:46:16 PM]
Glossary -> S
Checking the features of the service (like reliability and Billing Accuracy) that matter most to customers.
Service Quality, Monitoring
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Market Reform
http://regulationbodyofknowledge.org/glossary/m/market-reform/[17/01/13 9:46:47 PM]
Glossary -> M
Government intervention that is ostensibly designed to improve market performance, reflecting lessons learned
from past developments. Generally, such reform involves liberalization: reducing entry barriers and encouraging
new entry at those production stages where competition is feasible. In the case of electricity, reform might
involve restructuring generation, developing new incentives for improvements in transmission and distribution,
promoting regional trade, and adopting a regulatory system.
Market Reform
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Market Structure
http://regulationbodyofknowledge.org/glossary/m/market-structure/[17/01/13 9:47:20 PM]
Glossary -> M
The characteristics of a market, including concentration (the number and size of distribution of firms), extent of
product differentiation, entry conditions (including entry barriers), and degree of vertical integration.
Market Structure
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Regulation of Public vs. Private Companies, of Existing vs. New Firms
http://regulationbodyofknowledge.org/general-concepts/references/regulation-of-existing-versus-new-firms/[17/01/13 9:47:52 PM]
Rationale for Regulation,
Including Regulation of
Monopolies and Oversight of
Competitive Markets, Public
Interest Theory, Interest
Group Theory, and the
Difference Between Normative
and Positive Theories of
Regulation.
Rationale for Reform of Utility
Markets (e.g. Fiscal
Constraints, Technological
Change, Policy Innovations,
Incentives for Efficiency) and
the Elements of Market
Reform, Including Private
Participation, Liberalization,
and Regulation.
Common Roles of Regulators
Regulatory Objectives and
Priorities, Including Trade-Offs
in Objectives and Achieving
Balance in Pursuing
Objectives
Regulation of Market Structure
vs. Regulation of Conduct
Regulation of Public vs.
Private Companies, of Existing
vs. New Firms
Options and Critiques for
Private Participation In
Infrastructure
Regulatory Instruments
(Primary and Secondary
Legislation, Licenses,
Concessions)
Informational Asymmetry,
Limits to Regulation, and
Implications for Using
You're in the section: Foundations of Regulation -> Annotated Reading List -> Regulation of Public vs.
Private Companies, of Existing vs. New Firms
Note: Readers should cross-reference this section with Market Structure and Competition, Financial Analysis,
Price Level Regulation and Regulatory Process for information on these issues as they relate to public
enterprises.
Rationale for restructuring and regulation of a low priced public utility: a case study of Eskom in South
Africa
International Journal of Regulation and Governance 3(2): 77-102.
Eberhard, A. and M. Mtepa
Uses the case of Eskom in South Africa to examine the rationale for reforming oversight of a publicly-
owned operator. Examines issues of financial performance, price levels and trends, investment, labor
costs, and incentives.
Some Options for Improving the Governance of State-Owned Electricity Utilities
The World Bank, Discussion Paper No. 11, February 2004.
Irwin, T. and C. Yamamoto
Examines performance issues in state-owned electricity distributors and suggests options for improving
performance. Considers applying private-sector company law, legislation and contracts, public reporting,
corporate culture, pressure from lenders, listing minority shares, and techniques for alleviating the
government’s conflict of interest as owner and policy-maker.
Performance Evaluation for State-owned Enterprises
in Privatization and Control of State-owned Enterprises, edited by Ravi Ramamurti and Raymond Vernon. World
Bank Economic Development Institute, 1991, pp. 179-205.
Jones, Leroy P.
Describes an approach for regulating state-owned enterprises. The approach consists of a performance
evaluation system, a performance information system, and an incentive system.
Privatization, Restructuring, and Regulation of Network Industries
Cambridge, MA: MIT Press, 1999, Chapters 3 and 5.
Newbery, David M.
Compares incentives and performance of public versus private enterprises. States that public enterprises
are subject to greater government control and so serve the interests of the government. Private enterprises
respond to profit incentives and so are governed by incentive regulation. Empirical studies find that public
Regulation of Public vs. Private Companies, of Existing vs.New Firms
Core References
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Regulation of Public vs. Private Companies, of Existing vs. New Firms
http://regulationbodyofknowledge.org/general-concepts/references/regulation-of-existing-versus-new-firms/[17/01/13 9:47:52 PM]
Incentives Versus Command
and Control
Law and Economics
enterprises have lower prices than private enterprises, but studies of cost differences are inconclusive.
Liberalization is complicated by public enterprises.
Controlling State-owned Enterprises
in Privatization and Control of State-owned Enterprises, edited by Ravi Ramamurti and Raymond Vernon. World
Bank Economic Development Institute, 1991, pp. 206-233.
Ramamurti, Ravi
Examines why state-owned enterprises have in general not been successful. Suggests a contracting
system that could improve performance.
The Search for Remedies
in Privatization and Control of State-owned Enterprises, edited by Ravi Ramamurti and Raymond Vernon. World
Bank Economic Development Institute, 1991, pp. 7-25, pp. 7-25.
Ramamurti, Ravi
Provides an overview of problems and possible solutions in privatizing and regulating state-owned
enterprises.
Review of the Gas Access Regime: Draft Report
Melbourne, Australia, 2003.
Productivity Commission of Australia
Examines the regulation of established systems versus “greenfield” systems.
Economic regulation and cost-efficiency in Brazilian urban public transport: the case of Belo Horizonte
Institute of Applied Economic Research, Brazil, 2004.
de Ávila, Gomide
Analyses the main outcomes and consequences of the bidding process for urban bus services in Belo
Horizonte, Brazil, focusing on economic efficiency and changes in fares. Concludes that contracting out
bus services does not necessarily ensure cost-efficiency in the absence of a well-devised competitive
tendering process and an effective regulatory framework, and that more attention should be given to these
considerations in the design of future bidding processes.
Best Methods of Railway Restructuring and Privatization
CFS Discussion Paper Series, number 11, World Bank, Washington, D.C., 1995.
Kopicki, Ron and Louis Thompson
Provides context and guidance to restructure the railways. Addresses distinct structural issues associated
with rail enterprise reform, design of specialized intermediary institutions that carry out much of the work of
railway restructuring, and management techniques that are appropriately adapted to railway reform and
restructuring. Focuses on “best” methods built on seven case studies of recent railway restructuring efforts:
Japan National Railway, New Zealand Railways, Argentina Railways, Swedish Railways, British Railways,
and railroads in the United States, and Canadian Railways.
Launching Public Private Partnerships for Highways in Transition Economies
Transportation Paper series number 9, World Bank, Washington, D.C., 2005.
Queiroz, Cesar
Holds that there is a large potential for more private sector involvement in the financing and operation of
highway assets in transition economies. Reviews potential applications of partial risk guarantees, the
required legal framework (for example, concession law) for attracting private capital for PPP schemes,
possible steps for a country to launch a program of private participation in highways, the concept of
greenfield and road maintenance concession programs, and the treatment of unsolicited proposals.
Characteristics of Well-Performing Public Water Utilities
Sectoral ReferencesGAS
TRANSPORTATION
WATER
Regulation of Public vs. Private Companies, of Existing vs. New Firms
http://regulationbodyofknowledge.org/general-concepts/references/regulation-of-existing-versus-new-firms/[17/01/13 9:47:52 PM]
World Bank: Water Supply and Sanitation Working Notes. Note No. 9, May 2006.
Baietti, W. Kingdom, W. and van Ginneken, M.
Identifies attributes of well run public utilities and identifies important factors that influence their
performance. It proposes a framework of assessing public utility governance: accountability, autonomy,
customer orientation and market orientation.
Glas Cymru – harnessing the fundamentals of water service delivery
Regulatory Review, P. Vass, ed., Centre for Regulated Industries, Bath University, 2002/3.
Nigel Annett, Chris Jones, and Jeremy Liesner
Describes the strategy, operations, and financial make-up of Glas Cymru, a not-for-profit water operator in
the U.K.
Investment and Uncertainty: Historical Experience with Power Sector Investment in South Africa and its
Implications for Current Challenges
Working Paper, Management Program in Infrastructure Reform & Regulation, University of Cape Town Graduate
School of Business, 2006.
Steyn, Grové
Public enterprise, Private enterprise, State-owned enterprise, Competition, Liberalization
Key Words
Options and Critiques for Private Participation In Infrastructure
http://regulationbodyofknowledge.org/general-concepts/references/options-and-critiques-for-private-participation-in-infrastructure/[17/01/13 9:48:25 PM]
Rationale for Regulation,
Including Regulation of
Monopolies and Oversight of
Competitive Markets, Public
Interest Theory, Interest
Group Theory, and the
Difference Between Normative
and Positive Theories of
Regulation.
Rationale for Reform of Utility
Markets (e.g. Fiscal
Constraints, Technological
Change, Policy Innovations,
Incentives for Efficiency) and
the Elements of Market
Reform, Including Private
Participation, Liberalization,
and Regulation.
Common Roles of Regulators
Regulatory Objectives and
Priorities, Including Trade-Offs
in Objectives and Achieving
Balance in Pursuing
Objectives
Regulation of Market Structure
vs. Regulation of Conduct
Regulation of Public vs.
Private Companies, of Existing
vs. New Firms
Options and Critiques for
Private Participation In
Infrastructure
Regulatory Instruments
(Primary and Secondary
Legislation, Licenses,
Concessions)
Informational Asymmetry,
Limits to Regulation, and
Implications for Using
You're in the section: Foundations of Regulation -> Annotated Reading List -> Options and Critiques for
Private Participation In Infrastructure
Note: Readers should cross-reference this section with chapters on Market Structure and Competition, Financial
Analysis, Pricing, and Regulatory Process for information on these issues as they relate to public enterprises.
The Challenge of Reducing Non-Revenue Water (NRW) in Developing Countries. How the Private Sector
Can Help: A Look at Performance-Based Service Contracting
World Bank: Water Sector Board Discussion Paper Series, Paper No. 8, March 2007.
Examines a number of case studies, taken from some of the largest and most recent performance-based
NRW contracts. Lessons learned from the case studies are analyzed, showing the potential benefits of
NRW performance-based service contracting with the private sector.
Analysis of Power Projects with Private Participation under Stress
Washington, D.C.: The World Bank, 2005.
Covindassamy, M. Ananda, Daizo Oda, and Yabei Zhang
Examines issues of distress in private participation situations. Concludes that reforms without a strong
consensus is a major cause of distress for power projects and that power projects need financial
instruments to address macroeconomic instability while maintaining politically sustainable prices.
The Impact From Management And Lease/Affermage Contracts
Washington, D.C.: Public-Private Infrastructure Advisory Facility (PPIAF), 2006.
Ringskog, Klas Mary-Ellen Hammond and Alain Locussol
Reviews results from contracts with the private sector in water. Examines risk allocation, impacts on
performance, and cost and financing of the contracts.
Regulatory Requirements Under Different Forms of Utility Service Delivery
Macroconsulting, 2007.
Rodriguez Pardina, Martin, and Richard Schlirf Rapti
Examines forms of contracts with private sector participants. Draws lessons from examination of case
studies from Mali (electricity production and distribution, concession), Senegal (water production and
distribution; affermage), Niger (water production and distribution; affermage), Argentina (electricity
distribution; concession) and Peru (water production and distribution; concession).
Engaging Local Private Operators in Water Supply and Sanitation Services: Initial Lessons from
Options and Critiques for Private Participation InInfrastructure
Core References
Sectoral ReferencesWATER
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Options and Critiques for Private Participation In Infrastructure
http://regulationbodyofknowledge.org/general-concepts/references/options-and-critiques-for-private-participation-in-infrastructure/[17/01/13 9:48:25 PM]
Incentives Versus Command
and Control
Law and Economics
Emerging Experience in Cambodia, Colombia, Paraguay, The Philippines, and Uganda
World Bank: Water Supply and Sanitation Sector Board Working Note, Paper No. 12, December 2006.
Explains that developing effective partnerships between government institutions and local private operators
of water supply and sanitation services poses a number of challenges with respect to contract design,
selection criteria and procedures, financing arrangements, risk mitigation instruments, performance
improvement measures to develop technical skills and promote efficiency, and the regulatory and
monitoring framework. Assesses how governments in five countries supported by World Bank projects have
gone about addressing these challenges.
Getting the Assumptions Right: Private Sector Participation Transaction Design and the Poor in
Southwest Sri Lanka
World Bank: Water Supply and Sanitation Sector Board Discussion Paper Series, Paper No. 7, October 2006.
Investigates how a set of basic assumptions on service coverage, service levels, tariffs, and subsidies in
the proposed transactions in Southwest Sri Lanka held up against consumer preferences.
Innovative Contracts, Sound Relationships: Urban Water Sector Reform in Senegal
World Bank: Water Supply and Sanitation Sector Board Discussion Paper Series, Paper No. 1, January 2004.
Analyzes a successful reform process in Senegal. Describes how several years of hard work reforming the
sector resulted in considerable improvements in services for existing customers and expansion to new
customers.
Private Sector, Contract, Public, Private Partnership
Energy Stalemate: Independent Power Projects and Power Sector Reform in Ghana
Working Paper, Management Program in Infrastructure Reform & Regulation, University of Cape Town Graduate
School of Business, 2008.
Malgas, Isaac
Through the Fire: Independent Power Projects and Power Sector Reform in Côte d’Ivoire
Working Paper, Management Program in Infrastructure Reform & Regulation, University of Cape Town Graduate
School of Business, 2008.
Malgas, Isaac, and Katherine Nawaal Gratwick
Key Words
Case Studies
Regulatory Instruments (Primary and Secondary Legislation, Licenses, Concessions)
http://regulationbodyofknowledge.org/general-concepts/references/regulatory-instruments/[17/01/13 9:48:59 PM]
Rationale for Regulation,
Including Regulation of
Monopolies and Oversight of
Competitive Markets, Public
Interest Theory, Interest
Group Theory, and the
Difference Between Normative
and Positive Theories of
Regulation.
Rationale for Reform of Utility
Markets (e.g. Fiscal
Constraints, Technological
Change, Policy Innovations,
Incentives for Efficiency) and
the Elements of Market
Reform, Including Private
Participation, Liberalization,
and Regulation.
Common Roles of Regulators
Regulatory Objectives and
Priorities, Including Trade-Offs
in Objectives and Achieving
Balance in Pursuing
Objectives
Regulation of Market Structure
vs. Regulation of Conduct
Regulation of Public vs.
Private Companies, of Existing
vs. New Firms
Options and Critiques for
Private Participation In
Infrastructure
Regulatory Instruments
(Primary and Secondary
Legislation, Licenses,
Concessions)
Informational Asymmetry,
Limits to Regulation, and
Implications for Using
You're in the section: Foundations of Regulation -> Annotated Reading List -> Regulatory Instruments
(Primary and Secondary Legislation, Licenses, Concessions)
Understanding Regulation: Theory, Strategy, and Practice
New York: Oxford University Press, 1999, Chapter 4.
Baldwin, Robert, and Martin Cave
Describes basic regulatory strategies, such as command and control, self-regulation, incentive regulation,
and competition. Examines basic approaches that regulators use to facilitate competition.
Managing the Regulatory Process: Design, Concepts, Issues, and the Latin America and Caribbean
Story
Washington, D.C.: The World Bank Group, 1999, Chapter 3.
Guasch, J. Luis, and Pablo Spiller
Describes the basic regulatory instruments and provides examples of where they have been used.
Considers legislation, presidential decrees, and contracts.
Regulating Infrastructure: Monopoly, Contracts, and Discretion
Cambridge, MA: Harvard University Press, 2003, Chapters 1-2.
Gómez-Ibáñez, José
Views infrastructure regulation as a contracting problem and examines the choice of regulatory instrument.
Considers contract completeness, private contracts, concession contracts, and discretionary regulation.
Also examines variants of these contract types and hybrids.
Review of Electricity and Gas Licensing Regimes in NSW – Final Report
Independent Pricing and Regulatory Tribunal of New South Wales, January 2003.
IPART
Examines IPART’s licensing scheme, considering transparency, compliance and monitoring costs, and
incentives.
Regulation by Contract: A New Way to Privatize Electricity Distribution?
Energy and Mining Sector Board Discussion Paper Series Paper no. 7, March 2003.
Bakovic, T., B. Tenenbaum, and R. Woolf
Describes a contracting approach to regulating electricity distribution companies. Identifies the key
Regulatory Instruments (Primary and Secondary Legislation,Licenses, Concessions)
Core References
Sectoral ReferencesELECTRICITY
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Regulatory Instruments (Primary and Secondary Legislation, Licenses, Concessions)
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Incentives Versus Command
and Control
Law and Economics
characteristics of this approach, how contracts deal with various financial issues, and how regulators deal
with disputes.
ICT Regulation Toolkit
Washington, D.C.: infoDev and the International Telecommunications Union, 2007, Module 3.
Describes how to write and issue a license to provide telecommunications services, including the objectives
of licensing, the relationship with other regulatory instruments and with trade agreements, licensing new
entrants versus incumbents, designing and auctioning spectrum licenses, and how to maintain
transparency.
Telecommunications Legislation in Transitional and Developing Economies
World Bank Technical Paper No. 489, October 2000.
Schwarz, Tim, and David Satola
Examines elements of telecommunications legislation for developing economies. Considers privatization,
liberalization, WTO agreement, licensing, numbering, infrastructure sharing, competitive issues, property
law, spectrum, and the structure and role of the regulatory agency.
Private Financing of Toll Roads
RMC Discussion Paper Series, number 117, World Bank, Washington, D.C., 1996.
Fisher, Gregory and Suman Babbar
Provides an overview of the issues and challenges related to private toll road development. Eight case
studies are employed, covering a range of physical and market characteristics, country and concession
environments, public-private risk sharing arrangements, and financial structures.
Concessions for Infrastructure: A Guide to Their Design and Award
Finance, Public Sector, and Infrastructure Network, WTP 399, World Bank, Washington, D.C., 1998.
Kerf, Michael et al.
Provides a guide to the complex range of issues and options related to design, award, implementation,
monitoring, and modification of concessions. The main rationale for concessions is that they can facilitate
the regulation of natural monopolies. They can be used to create competition for the market under
conditions in which the service provider has significant market power.
Best Methods of Railway Restructuring and Privatization
CFS Discussion Paper Series, number 11, World Bank, Washington, D.C., 1995.
Kopicki, Ron and Louis Thompson
Provides context and guidance to restructure the railways. Addresses distinct structural issues associated
with rail enterprise reform, design of specialized intermediary institutions that carry out much of the work of
railway restructuring, and management techniques that are appropriately adapted to railway reform and
restructuring. Focuses on “best” methods built on seven case studies of recent railway restructuring efforts:
Japan National Railway, New Zealand Railways, Argentina Railways, Swedish Railways, British Railways,
and railroads in the United States, and Canadian Railways.
Public and Private Sector Roles in the Supply of Transport Infrastructure and Services
Transportation Paper Series number 1, World Bank, Washington, D. C., 2004.
Amos, Paul
Provides a framework for identifying and assessing the different models for public and private roles in the
transport sector. Highlights policy and regulatory issues which are important in judging the suitability of
different models; and summarizes the range of instruments available.
Road Infrastructure Concession Practice in Europe
French Highway Directorate, Paris, 2001.
TELECOMMUNICATIONS
TRANSPORTATION
Regulatory Instruments (Primary and Secondary Legislation, Licenses, Concessions)
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Bousquet, Franck and Alain Fayard
Reviews road infrastructure concessions in Europe with special emphasis on the role of public authorities
as overseers of the concessions.
Water Toolkit Module 1: Selecting an Option for Private Sector Participation
Washington, D.C.: World Bank, 1997.
World Bank
Outlines the broad-brush analysis required to assess the need and potential for introducing private
participation and selecting a mode of private sector participation.
New Designs for Water and Sanitation Transactions Making Private Sector Participation Work for the
Poor
Washington, D.C.: The World Bank, undated.
World Bank
Examines regulatory instruments and policies for improving water and wastewater services to the poor.
Considers elements of water reform, legal and policy frameworks, contracts, tariff design, and reform
strategies.
Contract regulation, License, Regulation, Legal frameworks, Franchise, Concession, Legislation, Statute
Managing the Regulatory Process: Design, Concepts, Issues, and the Latin America and Caribbean
Story
Washington, D.C.: The World Bank Group, 1999, Chapter 4.
Guasch, J. Luis, and Pablo Spiller
Telecommunications Regulation in Jamaica
in Regulations, Institutions, and Commitment: Comparative Studies in Telecommunications, edited by Brian Levy
and Pablo T. Spiller. Cambridge, U.K.: Cambridge University Press, 1996, pp. 36-78.
Spiller, Pablo T., and Clezly I. Sampson
WATER
Key Words
Case Studies
Informational Asymmetry, Limits to Regulation, and Implications for Using Incentives Versus Command and Control
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Rationale for Regulation,
Including Regulation of
Monopolies and Oversight of
Competitive Markets, Public
Interest Theory, Interest
Group Theory, and the
Difference Between Normative
and Positive Theories of
Regulation.
Rationale for Reform of Utility
Markets (e.g. Fiscal
Constraints, Technological
Change, Policy Innovations,
Incentives for Efficiency) and
the Elements of Market
Reform, Including Private
Participation, Liberalization,
and Regulation.
Common Roles of Regulators
Regulatory Objectives and
Priorities, Including Trade-Offs
in Objectives and Achieving
Balance in Pursuing
Objectives
Regulation of Market Structure
vs. Regulation of Conduct
Regulation of Public vs.
Private Companies, of Existing
vs. New Firms
Options and Critiques for
Private Participation In
Infrastructure
Regulatory Instruments
(Primary and Secondary
Legislation, Licenses,
Concessions)
Informational Asymmetry,
Limits to Regulation, and
Implications for Using
You're in the section: Foundations of Regulation -> Annotated Reading List -> Informational Asymmetry,
Limits to Regulation, and Implications for Using Incentives Versus Command and Control
Privatization, Restructuring, and Regulation of Network Industries
Cambridge, MA: MIT Press, 1999, Chapter 2.
Newbery, David M.
Explains that the interaction between the regulator and the regulated firm can be modeled as a game in
which the regulated firm has private information. The regulator chooses and announces the incentives that
the regulator will provide the firm. Then the firm decides how it will operate. Next the regulator observes
the operations and allows the firm the incentives promised. If the firm does not believe that the regulator
will keep her commitment, the firm will not perform optimally.
Designing Incentive Regulation for the Telecommunications Industry
Cambridge, MA: MIT Press, 1996, Chapter 1.
Sappington, David E.M., and Dennis L. Weisman
Explains that incentive regulation is useful because the firm has (or can acquire) better information than
the regulator about important aspects of the industry and the firm’s objectives and the consumers’
objectives are different. If the regulator had the same information that the firm has, then the regulator could
simply micromanage the firm. If the firm had the same goals as consumers, then the firm would naturally
do exactly what the regulator wanted the firm to do. In most situations, however, the firm has better
information than the regulator and seeks to maximize its profits (whereas consumers seek to maximize
their surplus), so incentive regulation can be used to improve the operator’s performance.
Privatization: An Economic Analysis
Cambridge, MA: MIT Press, 1988, Chapter 2.
Vickers, John, and George Yarrow
Explains that information asymmetry is at the heart of the economics of regulation. A fully informed
regulator with complete authority could simply order the firm to choose the first-best outcome. However,
regulators are never fully informed and have limited powers. “The problem for regulatory policy is one of
incentive mechanism design – how to induce the firm to act in accordance with the public interest (which
will depend on the state of technology and demand) without being able to observe the firm’s behavior.”
Information, Information Asymmetry, Accountability, Forms of regulation, Price cap regulation, Rate-of-return
Informational Asymmetry, Limits to Regulation, andImplications for Using Incentives Versus Command andControl
Core References
Key Words
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Informational Asymmetry, Limits to Regulation, and Implications for Using Incentives Versus Command and Control
http://regulationbodyofknowledge.org/general-concepts/references/informal-asymmetry-limits-to-regulation-implications-for-using-incentives/[17/01/13 9:49:35 PM]
Incentives Versus Command
and Control
Law and Economics
regulation, Regulatory procedures, Commitment, Incentive Regulation
Law and Economics
http://regulationbodyofknowledge.org/general-concepts/references/law-and-economics/[17/01/13 9:50:08 PM]
Rationale for Regulation,
Including Regulation of
Monopolies and Oversight of
Competitive Markets, Public
Interest Theory, Interest
Group Theory, and the
Difference Between Normative
and Positive Theories of
Regulation.
Rationale for Reform of Utility
Markets (e.g. Fiscal
Constraints, Technological
Change, Policy Innovations,
Incentives for Efficiency) and
the Elements of Market
Reform, Including Private
Participation, Liberalization,
and Regulation.
Common Roles of Regulators
Regulatory Objectives and
Priorities, Including Trade-Offs
in Objectives and Achieving
Balance in Pursuing
Objectives
Regulation of Market Structure
vs. Regulation of Conduct
Regulation of Public vs.
Private Companies, of Existing
vs. New Firms
Options and Critiques for
Private Participation In
Infrastructure
Regulatory Instruments
(Primary and Secondary
Legislation, Licenses,
Concessions)
Informational Asymmetry,
Limits to Regulation, and
Implications for Using
You're in the section: Foundations of Regulation -> Annotated Reading List -> Law and Economics
Judicial Corruption in Developing Countries: Its Causes and Economic Consequences
Berkeley Olin Program in Law & Economics, Working Paper Series, University of California, Berkeley, 1999.
Buscaglia, Edgardo
Provides an overview of the economics of development and corruption. Describes how corruption affects
economic development and remedies for corruption.
Law and economics in developing countries
Stanford, Calif.: Hoover Institution Press, 2000.
Buscaglia, Edgardo and William Ratliff
Examines the link between legal systems and reform of economic institutions and practices in developing
countries. States that poverty largely results from flaws in legal institutions. Recommends substantive and
procedural legal factors for developing countries, including recommendations on judicial review and dispute
resolution.
Institutions, Institutional Change and Economic Performance
Cambridge, U.K.: Cambridge University Press, 1990, Chapters 12 and 13.
North, Douglass C
Explains the importance of institutions to the stability and performance of the economy.
Economic Analysis of Law
Fifth Edition, New York: Aspen Law & Business, 1998, Chapters 1, 2, 9, 10, 12, 13, 19, and 20.
Posner, Richard A.
Explains economic principles that underlie laws in the common law context, specifically the U.S. Chapters
cited cover basic economic approaches, monopoly, competition law, utility regulation, the choice between
regulation and common law, the adversary system, and the process of rulemaking.
Institutions, Law, Regulation, Corruption, Opportunism, Legal Process
Law and Economics
Core References
Key Words
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Law and Economics
http://regulationbodyofknowledge.org/general-concepts/references/law-and-economics/[17/01/13 9:50:08 PM]
Incentives Versus Command
and Control
Law and Economics
Monopoly and Market Power
http://regulationbodyofknowledge.org/market-structure-and-competition/monopoly-market-power/[17/01/13 9:50:41 PM]
Monopoly and Market Power
Competition in Utility Markets
Competition for the Market
Concluding Observations
Related FAQs
Annotated Reading List
You're in the section: Market Structure and Competition -> Monopoly and Market Power
A monopoly exists when a single provider serves the entire market demand. Even though there are several
concepts of natural monopoly, they possess a common thread, namely, that rivalry in a particular market cannot
be sustained and perhaps is even inefficient.
One idea of natural monopoly is that in some situations competition self-destructs, resulting in a single firm
supplying the entire market demand. This idea led to the cost-based definition of natural monopoly, which states
that a firm is a natural monopoly if it is able to serve the entire market demand at a lower cost than any
combination of two or more smaller, more specialized firms. If the monopoly firm serves a single market, then
economies of scale are sufficient for the firm to be a natural monopoly, although other cost characteristics may
also result in a single-product firm being considered a natural monopoly. Economies of scale imply that the
firm’s average cost declines as the firm increases output. If the firm is a monopoly in several markets, more
complex cost concepts, such as economies of scope and cost subadditivity come into play. Economies of scope
exist when it is less costly for a single firm to provide two or more products jointly than for multiple firms to
provide the products separately. Cost subadditivity exists when a single firm is able to satisfy the entire
market demand(s) for its product(s) at a lower cost than two or more smaller, more specialized firms.2 The most
recent definition of natural monopoly states that a firm is a natural monopoly in a market if no more than one
firm can serve the market and receive non-negative profits.
Operators providing utility services have certain cost characteristics that sometimes make some portion of their
service a natural monopoly or at least make competition difficult to sustain at any appreciable level.3 For
example, operators tend to have high capital costs relative to firms in other sectors. Sometimes capital costs
constitute a sunk cost, which means the cost is unrecoverable if the operator decides to exit the market. Sunk
costs are a barrier to entry, which means that they make it less likely for firms to enter the market. Some portion
of the utility operations may also have high fixed costs, which are costs that do not vary with the output of the
firm. High fixed costs can lead to economies of scale, which may lead to natural monopoly.
If an operator in a market is a natural monopoly – in the sense that a single firm can serve the entire market
demand at a lower cost than two or more smaller firms – then the operator cannot recover all of its costs if its
prices are set at incremental cost. Left unregulated and without a threat of government intervention, a
profit maximizing monopoly operator would limit output to receive monopoly profits, which results in what
economists call a deadweight loss. If the natural monopoly operator were regulated, the regulator would need to
allow prices to exceed incremental cost for the operator to be commercially viable.
If a firm has economies of scale, economies of scope, or both, it may be difficult to develop prices that
encourage allocative efficiency. Allocative efficiency means that the optimal mix of outputs is provided. This form
of economic efficiency is said to exist when the price that customers pay for each product is equal to that
product’s marginal cost. Marginal cost is the cost of increasing output by one unit. Setting prices equal to
marginal cost is difficult when there are economies of scale because such prices would not result in sufficient
Monopoly and Market Power Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Monopoly and Market Power
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revenue to cover the firm’s total cost.
Likewise, with economies of scope, if prices for each product cover only the incremental cost of producing that
product, the firm would not receive sufficient revenue to cover its common costs. Incremental cost in this context
is the additional cost of producing the entire amount of a product, given that the firm is already producing all of
his other products. Common costs in this context are the costs that are necessary for the firm to produce its n
products, but that are unaffected by the dropping up to n – 1 of its products.4 Tariff Design examines possible
solutions to this pricing problem.
Even if the operator is not a monopoly, it may not be subject to significant competitive pressure. In this
situation, the firm is said to have market power or significant market power because the firm is able to receive
profits above its cost of capital by limiting output. Profits in this context refer to the income left after all input
suppliers and taxes have been paid. The cost of capital includes both the cost of equity, which is the rate of
return that shareholders must be paid for them to continue to supply equity capital for the firm, and the cost of
long term debt. The profit left over after the operator has paid interest on its long term debt is called the return
on equity. The difference between the return on equity and the cost of equity is called economic profit. A firm
with market power can receive economic profits because the firm can limit output below a competitive level,
which causes prices to rise.
Regulators have several tools available for detecting market power, such as the Herfindahl-Hirschman Index
(HHI), the Lerner Index, watching for collusive activities, and assessing barriers to entry. The HHI is an index of
the number of firms in the market and their market shares. The Lerner Index measures the degree to which
prices exceed marginal cost. Collusive activities include fixing prices and dividing markets. Barriers to entry
include sunk costs, switching costs, restricted access to essential facilities, and anticompetitive practices.
Switching costs exist when it costs more for a customer to change to a competitive supplier than it does to stay
with the customer’s existing supplier. Essential facilities are elements of the utility system, such as electricity
distribution lines that are needed to provide the utility service and that are uneconomical for a rival to supply for
itself. Anticompetitive practices are activities that a dominant firm may engage in to drive rivals from the
market.5
1. Monopoly and Market Power provides references for this topic.
2. Although technically complex, cost subadditivity is the key to identifying natural monopolies under the
cost-based view.
3. A utility network is a distribution system over which the utility service is provided. In the case of water,
electricity and gas, the service includes a commodity that is supplied over the network. The network is the
system of pipes that carry the water or natural gas, or the system of wires that transmit the electricity. In the
case of telecommunications, the service is primarily the use of the network, which may consist of switches,
routers, wires, and radio transmitters and receivers. The cost structure of a utility service provider generally
consists of fixed costs, capacity costs, and usage costs. Fixed costs are often high. There may also be
externalities. Environmental pollution from power production is an example of a negative externality. When a
person or business subscribes to telecommunications service, the new subscriber provides a positive
externality to the other subscribers who can now call this person or business.
4. Other definitions for incremental cost and common cost exist, so the reader needs to always be aware of
the context and use of the terms to ensure that the reader understands how they are being used.
5. Regulation of Marker Structure vs. Regulation of Conduct of Foundations of Regulation and the reference
sections on Institutional Design Issues and Stakeholder Relations examine the regulator’s relationships with
other government authorities, including the competition authority.
Footnotes
Monopoly and Market Power
http://regulationbodyofknowledge.org/market-structure-and-competition/monopoly-market-power/[17/01/13 9:50:41 PM]
Competition in Utility Markets
http://regulationbodyofknowledge.org/market-structure-and-competition/competition-utility-markets/[17/01/13 9:51:18 PM]
Monopoly and Market Power
Competition in Utility Markets
Competition for the Market
Concluding Observations
Related FAQs
Annotated Reading List
You're in the section: Market Structure and Competition -> Competition in Utility Markets
Regulators and policy makers implement competition in the utility market1 by removing legal and technical
barriers to entry, monitoring anticompetitive conduct, restructuring the sector, and providing access to essential
facilities. Legal barriers to entry include licenses restrictions and high license fees that sometimes limit the
number of firms that can serve a market.2 Technical barriers to entry include sunk costs and other barriers to
entry noted above.
Restructuring the industry generally involves a) separating the potentially competitive portions of the sector from
the non-competitive or natural monopoly3 portions and b) providing rivals with access to the non-competitive
portions, which should be considered essential facilities. This separation of competitive from non-competitive
may be accomplished through structural separation, functional separation, or unbundling. With structural
separation, the competitive and non-competitive components of the sector are provided by separate entities,
which may be under common ownership or separate ownership. For example, the government may not permit
competitive electricity generation operators from providing monopoly electricity distribution services. In a least
severe form, structural separations may simply mean that the components are owned by separate subsidiaries
of the same corporation. With functional separation the competitive components and non-competitive
components are provided by the same operator, but the personal and operations are separated.
Structural separation and functional separation are also called unbundling, but some forms of unbundling are
less severe than separation. For example with unbundling, the regulator may allow the provider of the non-
competitive component to provide a single service that combines the competitive and non-competitive portions
of the service, but the regulator would also require the operator to provide rivals with equal access to the
essential facilities under the same terms and conditions as the operator does its own competitive service. This is
a common approach in telecommunications.
Regulators generally require accounting separation if the regulator allows common ownership of competitive and
non-competitive components. The accounting separation requires this operator to separate its
accounting records between the competitive portion (which is often deregulated) and the non-competitive portion
(which is regulated).
To illustrate these restructuring options, consider the electricity industry. It is believed in many situations that
electricity generation can be competitive and that electricity transmission and distribution should be provided by
monopolies. Under a form of structural separation, electricity transmission and distribution are provided by
separate monopolies and generation is provided by operators that provide neither transmission nor distribution. If
the electricity operator is allowed to remain vertically integrated, which means that it continues to provide both
the upstream competitive electricity generation and the downstream, non-competitive transmission and
distribution, then the operator is required to unbundle transmission and distribution from generation and allow
rival generators to have access to these unbundled essential facilities. The vertically integrated operator is also
4
Competition in Utility Markets Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Competition in Utility Markets
http://regulationbodyofknowledge.org/market-structure-and-competition/competition-utility-markets/[17/01/13 9:51:18 PM]
often required to perform accounting separation.
Introducing competition raises issues of how to “buy out” the old regime by addressing issues of stranded costs
and uneconomic subsidies.5 Stranded costs are costs that the operator has properly incurred and that the
operator does not have a reasonable opportunity to recover given the introduction of competition. Stranded
costs are calculated as the difference between sunk costs and operating earnings from sunk assets. Potential
funders of stranded costs include shareholders, taxpayers, customers of this service provider, customers of
competitors, and competitors. Another transition issue is how to convert monopoly price structures to competitive
price structures. Traditional utility pricing contains a number of cross-subsidies that cannot be maintained when
there is competition. Some of these subsidies are unproductive in the sense that they do not assist the poor or
lead to network development. Such subsidies generally should be removed with an appropriate transition and
productive subsidies funded by a competitively neutral means.6
Because existing customers already have access to the utility network, introducing competition for these
customers raises issues of access to essential facilities and switching costs. Competition for new customers may
have these same issues if network access is a natural monopoly. However, if there are no existing facilities for
these new customers and if facilities can be competitive, then essential facilities and switching costs are not an
issue.
The pricing of access to essential facilities is important for the success of competition in the market for existing
customers. There are three basic forms of access. The first is exclusive use of unbundled facilities or capacity.
The second is one-way access, which is the situation where the competitive operator pays the essential facility
provider for transporting the competitive operator’s commodity (as in the case of gas or electricity) or service (as
in the case of telecommunications). The third is two-way access, which is the situation where the rival
operators both need access to each other’s network facilities for transporting their utility services. At present,
two-way access occurs primarily in telecommunications where competing telecommunications
operators interconnect their networks so that their customers can communicate with each other. If the essential
facility provider offers only the non-competitive portion of the service, then regulators establish prices that cover
the total cost of the operator. Otherwise, regulators typically price access at incremental cost.
The economics of access pricing depends in part on the nature of the relationship between the firms.7 Vertical
relationships are those where a network provider sells access to its network to a downstream service provider,
who is providing a retail service. The two operators involved in the transaction may (or may not) compete in the
retail market. Horizontal relationships are those where there are two or more rival networks and the
networks interconnect. This is most common in telecommunications. The appropriate pricing rules depend upon
whether the relationships are vertical (one-way interconnection) or horizontal (two-way interconnection), the
nature of competition, and the features of the regulatory system, to name a few. Common pricing options include
no regulation, the Efficient Component Pricing Rule (ECPR), global price caps, and cost-based prices, such as
fully distributed cost and long run incremental cost. The three models of short-term trading arrangements in
electricity are the integrated, wheeling, and decentralized models. In telecommunications, most regulators use
long run incremental cost for establishing interconnection charges.
Sometimes sector regulators share responsibility for ensuring competitiveness of markets with a
competition authority, but in some instances a sector regulator may have responsibility for competition.8 In
principle, competition policy tries to ensure that markets are competitive while regulation attempts to control
conduct when markets are not competitive. This difference in roles leads to differences in primary functions.
The competition regulator is generally concerned with all sectors and generally has three functions. The first
function is to remedy anticompetitive conduct, such as collusion. This function is generally ex post, meaning that
the competition authority responds to activities that have already occurred. In contrast, utility regulators generally
address competitive issues ex ante, meaning that they act to prevent anticompetitive conduct. The second
function is to ensure that industry mergers do not significantly decrease competition. The third function is
consumer protection. In practice, regulation attempts to control the conduct of firms with market power so that
they cannot take advantage of their market power to limit output, raise prices, or limit rivals’ abilities to compete.
Regulation may conflict with the goals of competition policy to pursue particular government objectives.
Competition in Utility Markets
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Sector regulators and competition authorities often cooperate in their efforts. Sector regulators may adopt ex
ante competition rules that complement the competition authority’s goals. Sector regulators may share sector
expertise with the competition authority when the competition authority is investigating anticompetitive conduct
or a proposed merger. The sector regulator may also investigate a proposed merger if the regulator has
responsibility for managing the sector licenses. Lastly, the sector regulator generally also plays a significant role
in consumer protection.
1. The reference section for Competition in Infrastructure Markets covers this topic.
2. Licenses are described in the Regulatory Instruments reference section.
3. Natural monopoly is defined in the reference section for Monopoly and Market Power.
4. The section titled Ring Fencing and Control of Cross-Subsidization covers accounting separations or ring
fencing.
5. See reference section for Competition in Infrastructure Markets. Tariff Design also covers issues of cost
recovery and how competition affects pricing.
6. The section titled Pricing for the Poor and Social Aspects also examine pricing for universal access and
universal service.
7. See the reference section for Competition in Infrastructure Markets.
8. See the reference section for Competition in Infrastructure Markets and the reference sections for
Institutional Design Issues and Stakeholder Relations for information on relationships with other agencies,
such as competition authorities.
Footnotes
Competition for the Market
http://regulationbodyofknowledge.org/market-structure-and-competition/competition-market/[17/01/13 9:51:56 PM]
Monopoly and Market Power
Competition in Utility Markets
Competition for the Market
Concluding Observations
Related FAQs
Annotated Reading List
You're in the section: Market Structure and Competition -> Competition for the Market
When elements of the utility system exhibit natural monopoly characteristics,1 customers can still gain some
benefits of competition through effective use of competition for the market 2. In these situations, the government
often auctions off the right to be a monopoly. Doing so can improve the efficiency of the utility services because:
(1) cost efficiency is achieved because the firm able to “pay” the most for the market would also be the firm that
could serve the market at the lowest cost; and (2) monopoly rents can be distributed to customers. This latter
feature occurs if firms bid their retail prices (with the lowest bid winning) or if the firms’ bid payments for the
franchise and the franchise fees are returned to customers.
The goal of an auction is to provide the potential operators with an incentive to reveal their private information,
which is in this case their ability to serve the market efficiently. Said another way, the goal of an auction is to
learn which operator is best able to provide value to customersand the value that this operator places on the
opportunity to serve. Several auction models exist, including the English auction and the Vickrey auction. In a
modified English auction, the auctioneer begins with a high price (to be charged to the customers). All firms who
are willing to provide service at this price signal that they are active. If there is more than one active firm, the
auctioneer lowers the price one step and again the bidders signal whether they are active. This
process continues until there is only one active firm. Another approach is the Vickrey auction, in which all firms
submit their bids and the firm with the best bid wins, but receives the price of the second lowest bidder.
Regardless of the type, an auction must be both well run and well designed to be successful. Key design
features include transparency and objective criteria for evaluating bids. Furthermore, to avoid significant
renegotiation and to reduce risk, the concession contracts should clearly establish rights, obligations, risks and
incentives for the operator. Renegotiation is especially problematic if regulators have incomplete information and
weak monitoring capabilities. Firms with market power are able to exploit these weaknesses.
If there are a large number of bidders, open auctions and fixed price contracts are more desirable; otherwise,
first-price sealed bid auctions may be preferable. Risk aversion on the part of bidders also increases the
desirability of sealed bids.
Negotiations are generally unavoidable with franchises, even with auctions. This does not mean, however, that
auctions have no value because using even some auction processes in concession letting can improve results.
Auctions reveal information about operators and markets. Also, having a large number of bidders or diversity
among bidders decreases the likelihood of collusion and lowers the danger of the winner’s curse.
Regulatory involvement in the operator procurement process has advantages and disadvantages. On the plus
side, the regulator can provide sector expertise in pre-qualification and bid evaluation, ensure transparency, and
ensure continuity between the procurement phase and the contract enforcement phase. On the negative side,
the regulator may lose some objectivity in enforcement if the regulator becomes concerned about the
appearance of success of the procurement phase.
Competition for the Market Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
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Competition for the Market
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Contract design is critical for the successful implementation of a competition-for-the-market policy. Concession
contracts should clearly set rights, obligations, risks and incentives. However because of uncertainty, it is
generally impossible to write a complete contract, which is a contract that covers all possible contingencies. As
a result, some contracts provide for ongoing or periodic review of prices, service obligations, investments, and
the like so that adjustments can be made for conditions that could not be anticipated at the outset of the
concession. If such reviews are difficult for a country, it is sometimes possible to rebid the contract. Rebidding
allows operators to adjust to changes in the economy or operating environment. With any rebidding, whether
frequent or infrequent, if there are significant fixed costs then the transfer of assets to new franchisees may be
necessary. The terms and conditions for these transfers should be set out in advance. Furthermore, because
there can be significant costs in conducting an auction and in preparing bids for an auction, small systems may
need to combine into a single auction to minimize such transaction costs.
The regulatory framework and the institutional capabilities the regulator affect the success of concession and
franchising arrangements. Research has shown that renegotiation problems result from regulators having
incomplete information and weak monitoring capabilities, allowing the operator to leverage its superior
information to press for the renegotiation. Firms with market power are especially able to exploit these
weaknesses because the information asymmetry is greater, all other things being equal, and they may be better
able to influence the political process than firms with less market power. Frequent rebidding may help remedy
these problems, but concession and franchising agreements need to have detailed provisions for renewal and
asset transfer.
1. The reference section for Monopoly and Market Power contains definitions of natural monopoly.
2. The reference section for Competition for the Market covers this topic.
Footnotes
Concluding Observations
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Monopoly and Market Power
Competition in Utility Markets
Competition for the Market
Concluding Observations
Related FAQs
Annotated Reading List
You're in the section: Market Structure and Competition -> Concluding Observations
Facilitating competition is one regulatory instrument for overcoming market power and asymmetries in
objectives and information.1 Competition in the market is generally the preferred form of competition, but
competition for the market is often effective if competition in the market is infeasible or impractical because of
natural monopoly. Generally if competition in the market is the policy choice, the regulator has an ongoing role
of regulating access to essential facilities, ensuring that barriers to entry do not interfere with competitive
dynamics, and monitoring the effectiveness of the competition. If one or more of the firms have significant
market power, then regulators may use price cap regulation to control the residual market power until
competition develops more fully.
Competition for the market involves having operators bid for the right to be the monopoly provider of the
service. Because the future is uncertain, ongoing regulation of prices and renegotiation of the concession
contract are common. Frequent rebidding of the concession may be an option for reducing the need for ongoing
regulation and for renegotiation.
1. The reference section for Informational Asymmetry covers information asymmetries.
Concluding Observations
Footnotes
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
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Home About Introduction Overview Glossary Frequently Asked Questions
Related FAQs
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Monopoly and Market Power
Competition in Utility Markets
Competition for the Market
Concluding Observations
Related FAQs
Annotated Reading List
How can a telecommunications regulator determine whether the interconnection tariffs a company proposes
will encourage efficient entry by low cost suppliers?
Are there other factors than the cost of interconnection that needs to be considered by a telecoms
regulator?
Are there differences between cost models in retail vs. interconnection pricing?
What is the difference between cost-based and retail-price based interconnection charges?
How should a regulator resolve disputes related to interconnection?
Related FAQs Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Annotated Reading List
http://regulationbodyofknowledge.org/market-structure-and-competition/references/[17/01/13 9:53:40 PM]
Monopoly and Market Power
Competition in Infrastructure
Markets
Competition for the MarketFactors Leading to Monopoly Core References Understanding Regulation: Theory, Strategy, and Practice New
York: Oxford University Press, 1999, Chapter 15. Baldwin, Robert, and Martin Cave Explains. [ Read more ... ]
Approaches to Competition Core References Understanding Regulation: Theory, Strategy, and Practice New
York: Oxford University Press, 1999, Chapters 13 and 16. Baldwin, Robert, and Martin Cave Ex. [ Read more ...
]
General Concepts and Efficiency Impacts Core References Understanding Regulation: Theory, Strategy, and
Practice New York: Oxford University Press, 1999, Chapter 20. Baldwin, Robert, and Martin Ca. [ Read more ...
]
Annotated Reading List for Market Structure andCompetitionMonopoly and Market Power
Competition in Infrastructure Markets
Competition for the Market
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Monopoly and Market Power
http://regulationbodyofknowledge.org/market-structure-and-competition/references/monopoly-and-market-power/[17/01/13 9:54:13 PM]
Monopoly and Market Power
Competition in Infrastructure
Markets
Competition for the Market
You're in the section: Market Structure and Competition -> Annotated Reading List -> Monopoly and
Market Power
Understanding Regulation: Theory, Strategy, and Practice
New York: Oxford University Press, 1999, Chapter 15.
Baldwin, Robert, and Martin Cave
Explains cost-based definition of a natural monopoly that produces a single product. Provides practical
illustrations and describes pricing implications.
Fundamentals of Economic Regulation
Working Paper 03-17, Public Utility Research Center, University of Florida, 2003.
Berg, Sanford V
Explains that an industry is a natural monopoly if a single firm can serve the market at a lower cost than
multiple firms.
Methods for Increasing Competition in Telecommunications Markets
University of Florida, Department of Economics, PURC Working Paper, 2008.
Jamison, Mark A.
Explains economics of vertical and horizontal market structure, with emphasis on telecommunications
markets.
The Economics of Regulation: Principles and Institutions
Cambridge, MA: MIT Press, 1988, Reissue Edition, Chapter 4.
Kahn, Alfred
Explains that natural monopoly is a situation where the potential economies of scale in an industry are so
pervasive that the best way to take advantage of them is to have one firm serve the entire market. Further
states that it may be that these economies of scale are not achieved efficiently; rather, they may result from
imperfect regulation or a lack of incentives for the firm to operate efficiently.
Principles of Transport Economics
North Hampton, Massachusetts: Edward Elgar Publishing Company, 2004.
Quinet, Emile and Roger Vickerman
Discusses the causes of natural monopolies in transport – economies of scale and scope, network
economics and the need for expensive and lumpy infrastructure. Issues addressed include geographical
fragmentation, horizontal separation and vertical separation. Explains the role of competition as a means of
Monopoly and Market Power
Factors Leading to MonopolyCore References
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Monopoly and Market Power
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control of monopoly. Topics included are fringe competition, comparison competition and conditions of
network access.
Cross-Subsidization: Pricing in Public Enterprises
American Economic Review 65: 1975, pp. 966-977.
Faulhaber, G.
Seminal paper on cost-based definition of natural monopoly for a multi-product firm. Uses technical
economics.
Cross-subsidization: Pricing in Public Enterprises
in The Political Economy of Privatization and Deregulation edited by Elizabeth E. Bailey and Janet Rothenberg.
Brookfield, VT: Elgar, 1995, pp. 233-244.
Faulhaber, G.R.
Less technical paper on cost-based definition of natural monopoly for a multi-product firm.
Industry Structure and Pricing: The New Rivalry in Infrastructure
Norwell, MA: Kluwer, 1999, Chapter 3.
Jamison, Mark A.
Supplements Faulhaber’s work with the idea that firms from other markets may be able to enter the
monopoly market and compete for at least some of the customers.
Monopoly, Natural Monopoly, Economies of Scale, Economies of Scope, Cost Subadditivity
Note: Readers should cross-reference this section with Tariff Design.
Understanding Regulation: Theory, Strategy, and Practice
New York: Oxford University Press, 1999, Chapter 15.
Baldwin, Robert, and Martin Cave
Explains cost-based definition of a natural monopoly that produces a single product. Provides practical
illustrations and describes pricing implications.
The Economics of Regulation: Principles and Institutions
Cambridge, MA: MIT Press, 1988, Reissue Edition, Chapter 4.
Kahn, Alfred
Explains that natural monopoly in a single product implies decreasing average costs. Decreasing average
costs can arise from several factors, but should not be confused with costs decreasing over time. Marginal
cost pricing, in the presence of decreasing average costs, results in revenues that do not cover total cost.
Solutions to this problem include price discrimination and subsidies.
Economics of Regulation and Antitrust
Cambridge, MA: MIT Press. 2000, Chapters 4 and 11.
Viscusi, W. Kip, John M. Vernon, and Joseph E. Harrington, Jr.
Describes how monopolists restrict output, which results in a deadweight loss relative to perfect
competition. Explains that marginal cost pricing, in the presence of decreasing average costs, results in
revenues that do not cover total cost. Solutions to this problem include non-linear pricing, Ramsey pricing,
subsidies, franchise bidding, price discrimination, and public ownership.
Other References
Key Words
Pricing Under Monopoly – Efficiency Aspects and Cost Recovery
Core References
Basic Economics of Network Industries
Monopoly and Market Power
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Understanding Regulation: Theory, Strategy, and Practice
New York: Oxford University Press, 1999, Chapter 16.
Baldwin, Robert, and Martin Cave
Explains the choice between monopoly and competition. Considers the factors that determine which
market structure may be more desirable and transitions from monopoly to competition.
Fundamentals of Economic Regulation
Working Paper 03-17, Public Utility Research Center, University of Florida, 2003.
Berg, Sanford V
Explains that infrastructure industry networks consist of links, nodes, and branches, with heavy fixed costs
associated with each point. Competition may be feasible in the market, but even with natural monopoly
competition is feasible for the market.
Economics of Regulation and Antitrust
Cambridge, MA: MIT Press. 2000, Chapter 11.
Viscusi, W. Kip, John M. Vernon, and Joseph E. Harrington, Jr.
Describes cost structure of traditional utility services.
Making Competition Work in Electricity
New York: Wiley & Sons, 2002, Chapter 2.
Hunt, Sally
Describes the traditional physical functions in the electricity industry, namely generation (production),
transmission, system operations, and distribution. Explains each function. Further explains that electricity is
different from other commodities in that it cannot be stored, it takes the path of least resistance, and
transmission of power over the network is subject to complex series so that what happens in one place can
affect the network many miles away.
Economics of Regulation and Antitrust
Cambridge, MA: MIT Press. 2000, Chapter 18.
Viscusi, W. Kip, John M. Vernon, and Joseph E. Harrington, Jr.
Describes cost characteristics of oil and natural gas and the regulation of natural gas.
The Economics of Networks
International Journal of Industrial Organization 14 (6), October 1996, pp. 673-699. Available at
http://www.stern.nyu.edu/networks/site.html.
Economides, Nicholas
Provides a summary of the economics of networks. Explains network externalities in telecommunications,
including their sources and their effects on pricing and market structure. Examines issues of compatibility,
technical standards, and interconnection, including their effects on pricing and quality of services and on
the value of network links in various ownership structures.
Methods for Increasing Competition in Telecommunications Markets
University of Florida, Department of Economics, PURC Working Paper, 2008.
Jamison, Mark A.
Describes economics of market structure in telecommunications.
Concessions for Infrastructure: A Guide to Their Design and Award
Finance, Public Sector, and Infrastructure Network, WTP 399, World Bank, Washington, D.C., 1998.
Core References
Sectoral ReferencesELECTRICITY
GAS
TELECOMMUNICATIONS
TRANSPORTATION
Monopoly and Market Power
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Kerf, Michael et al.
Provides a guide to the complex range of issues and options related to design, award, implementation,
monitoring, and modification of concessions. Main rationale for concessions is that they can facilitate the
regulation of natural monopolies. They can be used to create competition for the market under conditions
in which the service provider has significant market power.
The Economics of Urban Water Systems
in Thirsting for Efficiency, edited by Mary M. Shirley. Washington, D.C.: The World Bank, 2002, pp.43-63.
Noll, Roger G.
Describes the economics of water in developing countries. Considers issues of supply costs, the political
economy of water, externalities in supply, water demand, and usage externalities.
Government Opportunism and the Provision of Water
in Spilled Water: Institutional Commitment in the Provision of Water Services, edited by William Savedoff and
Pablo Spiller. Washington, D.C.: Inter-American Development Bank, 1999, Chapter 1.
Savedoff, William, and Pablo Spiller
Explains that “potable water services share three basic characteristics with other utilities that make it
difficult to provide them through perfectly competitive markets: large sunk costs, economies of density
and/or scale, and massive consumption. The combination of these characteristics leads to significant
politicization of the sector’s pricing and operations.” Each item is explained in detail. Later chapters provide
case studies to illustrate these concepts.
Competition, Monopoly, Costs, Externalities, Network
Competition Policy for Small Market Economies
Cambridge, MA: Harvard University Press, 2003, Chapters 3-4.
Gal, Michal S.
Describes the implications of small economies for competition policy and the regulation of a single
dominant firm. Considers the goals of competition policy, how small size limits the effectiveness of
structural remedies, the difference between rules that can be applied in large versus small economies, the
definition of market dominance, the effects of market dominance in a small economy, and the regulation of
market dominance.
Methods for Increasing Competition in Telecommunications Markets
University of Florida, Department of Economics, PURC Working Paper, 2008.
Jamison, Mark A.
Describes numerous barriers to entry, implications of vertical integration, and possible regulatory remedies.
Economic Analysis of Law
Fifth Edition, New York: Aspen Law & Business, 1998, Chapter 10.
Posner, Richard A.
Explains the economics of competition laws. Considers cartels, horizontal restrictions, mergers, market
definition, predation, foreclosure, tie-ins, and barriers to entry.
Economics of Regulation and Antitrust
Cambridge, MA: MIT Press. 2000, Chapters 5-6.
Viscusi, W. Kip, John M. Vernon, and Joseph E. Harrington, Jr.
WATER
Key Words
Definition and Measurement of Market Power, Including FactorsInfluencing Extent of Market Power, Such as Barriers to EntryCore References
Monopoly and Market Power
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Explains how to define markets, assess market concentration, consider scale economies, examine entry
conditions and market contestability, and identify dominant firms and anticompetitive activities such as
raising rivals’ costs and predatory pricing. Describes classic U.S. cases of monopolization.
Making Competition Work in Electricity
New York: Wiley & Sons, 2002, Chapters 4-6.
Hunt, Sally
Explains that market power can be exercised by restricting output. In general, “the best solution to market
power is to … hav(e) enough competitors in the first place.” Discusses second best solutions. States that
markets must be designed with a mechanism for allowing consumers to ration usage in response to high
prices. Explains problems of using the HHI in energy. Describes how studies have tried to measure market
power by estimating marginal costs and comparing them to prices, but accurately estimating marginal costs
is very difficult.
Prospects for Gas Supply and Demand and their Implications with Special Reference to the UK
in Competition and Regulation in Utility Markets, edited by Colin Robinson, Cheltenham, UK: Edward Elgar,
2003, pp. 91-120.
Kemp, Alexander, G., and Linda Stephen
Provides a case study of analyzing the U.K. gas markets. Considers location of production and
consumption, imports, infrastructure, and gas contracts.
Analyzing Telecommunications Market Competition: Foundations for Best Practices
University of Florida, Department of Economics, PURC Working Paper, 2009.
Hauge, Janice and Mark Jamison
Explains how to identify market boundaries and measure the intensity of competition, with particular
attention to telecommunications in developing countries.
ICT Regulation Toolkit
Washington, D.C.: infoDev and the International Telecommunications Union, 2007, Module 2.
Explains general principles for competition policy and how to define the market, identify barriers to entry,
define market power and market dominance, and identify essential facilities. Explains remedies for
anticompetitive conduct, such as abuse of dominance, restricting access to essential facilities, and
engaging in cross-subsidization, predatory pricing, and price squeezes. Also describes how to assess
mergers and joint ventures.
Competition in the Provision of Fixed Telephony Services
Director General of Telecommunications, Office of Telecommunications, London, U.K., 2001.
Oftel
Describes how the U.K. telecommunications regulator assesses competition by defining relevant markets;
assessing existing levels of competition in each relevant market using comparisons with similar countries,
consumer satisfaction surveys and complaints, the extent to which prices reflect underlying costs, the
extent to which consumers are knowledgeable about different market opportunities and/or face barriers to
switching, the absence of inefficient suppliers, the absence of anticompetitive behavior and entry barriers,
and the extent to which market structure has changed over time, and active price, quality, and innovation
competition.
Rules for Conducting Market Analysis and Identifying the Significant Market Power
December 12, 2002.
Romania National Regulatory Authority for Communications
Details how the Romanian telecommunications regulator determines significant market power under
Sectoral ReferencesELECTRICITY
GAS
TELECOMMUNICATIONS
Monopoly and Market Power
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European Union guidelines. Describes how the relevant market is defined in terms of product and
geography, and the criteria used to assess competition, including market share and its stability, vertical
integration, number of competitors, users’ countervailing power, price evolution and profit level, and control
over a network or infrastructure that is difficult to duplicate.
Natural monopoly privatisation under different regulatory regimes: A comparison of New Zealand and Australian
airports
International Journal of Public Sector Management. Vol: 18 No.3 (2005), 274 – 292.
Domney, Mark D., Heather I.M. Wilson, Er Chen
Compares the profitability and technical efficiency of firms in a monopoly industry, airports, operating with
different degrees of market power and under differing regulatory regimes, minimalist in New Zealand and
interventionist in Australia. The technical efficiency of privatised airports is assessed, and this independent
measure is used in regression analyses to determine whether efficiency, regulation or privatisation is
related to airport profitability. For firms with monopolistic characteristics operating under minimalist
regulation, profitability is related to market power, not efficiency improvements. For firms operating in a
regulated environment, profitability is related to regulation, which constrains market power but does not
impede efficiency.
Competition, Market power, Anti-competitive, Entry, Barriers to Entry
Regulatory Reforms in India: Effectiveness, Efficiency, and Impacts
The Energy and Resources Institute, New Delhi, India, 2003.
Garg, A., M. Kabra, and R. Kacker
U.S. Experiences with Business Separation in Telecommunications
University of Florida, Department of Economics, PURC Working Paper, 2008.
Jamison, Mark A., and James Sichter
Analyzing Telecommunications Market Competition: A Comparison of Cases
University of Florida, Department of Economics, PURC Working Paper, 2009.
Jamison, Mark, Sanford Berg, and Liangliang Jiang
Introducing Competition into the Electricity Supply Industry in Developing Countries: Lessons from Bolivia
August 2000.
Joint UNDP/World Bank Energy Sector Management Assistance Programme
Report on the Effectiveness of Competition in Hong Kong’s Telecommunications Market: An International
Comparison
June 2003.
Office of Telecommunications Authority, Hong Kong (OFTA)
Determination Notice: Assessment of Dominance in Mobile Call Termination
OUR, Kingston, Jamaica, September 2, 2004.
Office of Utilities Regulation
Privatization of Electricity Distribution: The Orissa Experience
Tata Energy Research Institute, New Delhi, India, 2003. Purchase.
Ramanathan, K. and S. Hasan
TRANSPORTATION
Key Words
Case Studies
Monopoly and Market Power
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Competition in Infrastructure Markets
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Monopoly and Market Power
Competition in Infrastructure
Markets
Competition for the Market
You're in the section: Market Structure and Competition -> Annotated Reading List -> Competition in
Infrastructure Markets
Understanding Regulation: Theory, Strategy, and Practice
New York: Oxford University Press, 1999, Chapters 13 and 16.
Baldwin, Robert, and Martin Cave
Explains competition between regulatory agencies and how this competition affects market outcomes.
Describes models for coordination. Also explains the choice between monopoly and competition. Considers
the factors that determine which market structure may be more desirable and transitions from monopoly to
competition.
Competition Policy for Small Market Economies
Cambridge, MA: Harvard University Press, 2003, Chapter 4.
Gal, Michal S.
Explains regulation of monopolies in a small economy context. Defines monopoly and describes
approaches to regulating a pure monopoly (a monopoly that does not also compete against other firms)
and to regulating a monopoly that competes with downstream rivals. Considers the viability of these
downstream rivals.
Managing the Regulatory Process: Design, Concepts, Issues, and the Latin America and Caribbean Story
Washington, D.C.: The World Bank Group, 1999, Chapter 10.
Guasch, J. Luis, and Pablo Spiller
Examines alternative market structures, transfer pricing, private sector access, and the sequencing of
reforms.
Competition in Network Industries – Where and How to Introduce It
Note no. 104 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 1997.
Klein, Michael, and Philip Gray
Explains concepts of competition for the market, competition over existing networks, and competition
among networks with practical examples. Describes various options for using competition in these sectors,
including franchising, open access, pooling, and timetabling. Explains that how network competition is
introduced and how effectively and easily it is implemented will vary from one network industry to another.
General rules for deciding where and how to introduce competition are discussed.
Restructuring Public Utilities for Competition
Washington, D.C, 2001.
Competition in Infrastructure Markets
Approaches to CompetitionCore References
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Competition in Infrastructure Markets
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OECD
Provides a systematic review of alternative approaches to promoting competition in public utilities. First
discusses the relationship between the market structure of these industries and the likely emergence of
competition and emphasizes the problem of access to the natural monopoly segment. Then outlines the
pros and cons of various policies that address this issue. Surveys some countries’ experiences in
restructuring their public utility sectors.
The Arguments For and Against Ownership Unbundling of Energy Transmission Networks
ESRC Electricity Policy Research Group, University of Cambridge, 2007.
Pollitt, Michael
Examines models of transmission ownership. Identifies costs and benefits of various approaches using
case studies, empirical evidence, and guidance from theoretical models.
Competition in Electricity Markets
Washington, D.C.: International Energy Agency, 2001.
OECD/IEA
Describes the reforms implemented in OECD countries aimed at developing competition in the electricity
supply industry and discusses the issue of designing the regulatory framework that would enhance
competition. Assesses the emerging model of electricity supply reform and evaluates its relative efficiency.
Considers the challenge for electricity market reform and the future outlook for reform.
Electricity Market Design and Creation in Asia Pacific
World Energy Council
Examines electricity market reform in the Asia Pacific. Considers objectives of reforms and issues of
customer choice, stranded assets, attracting investment, maximizing asset value, universal access
agreements, integration of the grid, and debt. Describes market design options, including competition to
build versus competition to operate generating plants.
Regulatory Reform: European Gas
Washington, D.C.: International Energy Agency, 2000.
OECD/IEA
Considers the type of regulatory reform approach that is best suited for developing effective competition
and increased trade and liquidity in European gas markets. Discusses the current institutional system and
makes a case for a deep reform of this system. States that reform should take security of supply as a key
issue for this constitutes an important feature of the European gas industry. Assesses the situation and
outlook for natural gas demand and supply in Europe.
Analyzing Telecommunications Market Competition: Foundations for Best Practices
University of Florida, Department of Economics, PURC Working Paper, 2009.
Hauge, Janice and Mark Jamison
Explains how to identify market boundaries and measure the intensity of competition, with particular
attention to telecommunications in developing countries.
ICT Regulation Toolkit
Washington, D.C.: infoDev and the International Telecommunications Union, 2007, Module 2.
Explains how to identify barriers to entry, define market power and market dominance, and identify
essential facilities. Explains remedies for anticompetitive conduct, such as abuse of dominance, restricting
access to essential facilities, and engaging in cross-subsidization, predatory pricing, and price squeezes.
What the Transformation of Telecom Markets Means for Regulation
Sectoral ReferencesELECTRICITY
GAS
TELECOMMUNICATIONS
Competition in Infrastructure Markets
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Note no. 121 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 1997.
Smith, Peter
Explains that regulators need to set the rules regarding entry (if there are to be such rules), allocate
licenses through bidding mechanisms, resolve network interconnection issues, authorize rate rebalancing to
better align prices with underlying costs, and better target subsidies and administer them in a way that
does not advantage certain operators. State that in many cases, competition through the sale of property
rights (such as radio spectrum) can eliminate the need for regulation, and the market can be regulated in a
way more in line with antitrust regulation.
Liberalization of the Philippine international air transport industry: que pasó? Competition policy is an essential
factor for successful liberalization of the airline industry in Philippines
Paper provided by Philippine Institute for Development Studies (PIDS), Philippines , 2001.
Austria, M.S.
Analyzes the liberalization and deregulation policy for the international air transport industry in the
Philippines. Examines the effects of these policies on competition and market structure, and identifies
areas where reforms are needed. Emphasizes the importance of the policy and recommends that
competition policy should focus on, among others: (1) market access; (2) access to inputs; and (3) mergers
and acquisitions.
Africa Infrastructure Country Diagnostic: Stuck in Traffic: Urban Transport in Africa
Working Paper number 44980, World Bank, Washington, D.C., 2008.
World Bank and Sub-Saharan Africa Transportation Project
Summarizes recent research on urban transport in 14 large African cities. Provides a comprehensive
overview of the state of urban transport in Africa, with a view to drawing out the main challenges facing
the sector and illustrating the different ways in which these have been addressed.
Port Reform Toolkit, 2nd Edition
Public-Private Infrastructure Advisory Facility, World Bank.
World Bank Transport Group
Provides guidance for undertaking sustainable and well-considered reforms of public institutions that
provide, direct, and regulate port services in developing countries.
Independent Water and Sanitation Providers in African Cities: Full Report of a Ten-Country Study
UNDP-World Bank Water and Sanitation Program. Washington, D.C., World Bank, April 2000.
Collignon, Bernard, and Marc Vezina
Examines role of small and independent water providers (vendors, water truckers and network providers) in
providing water to the urban poor in Africa. States that small-scale providers respond to market niches and
meet the needs of both the poor and other unserved communities. Explains how such services are
provided and funded; the relationships between small-scale providers, local authorities, and larger-scale
water providers; and policy issues.
Competition in Water and Sanitation
Note no. 165 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, December 1998.
Solo, T. M.
Explains that efficient, large-scale, monopolistic companies may be the best alternative in Europe and the
United States, but it is hard to replicate such efficiencies in the utility companies of developing countries.
States that small-scale operators tend to be customer-driven, financially viable, and ready to apply
innovative technologies and marketing methods. They also provide appropriate solutions in appropriate
places, assume all investment risks, reach the poor, charge market prices, cover costs, and respect
willingness to pay.
Improving Water Services through Competition
TRANSPORTATION
WATER
Competition in Infrastructure Markets
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Note no. 164 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, December 1998.
Webb, M., and Ehrhardt, D.
Describes four means of introducing product market competition: competing networks, private supply, retail
competition, and common carriage competition. Explains that to promote competition, governments may
have to develop an efficient bulk supply or network access regime. Concludes that the most important part
of such a regime is the price of bulk supply or network access. Considers differences in water quality and
how they affect common carriage arrangements. Concludes that the case for common carriage competition
in water is less compelling than in other industries.
The Economics of Urban Water Systems
in Thirsting for Efficiency, edited by Mary M. Shirley. Washington, D.C.: The World Bank, 2002, pp.43-63.
Noll, Roger G.
Examines prospects for reform in developing countries and conditions that lead to reform.
Competition in Network Industries – Where and How to Introduce It
Note no. 104 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 1997.
Klein, Michael, and Philip Gray
Explains concepts of competition for the market, competition over existing networks, and competition
among networks with practical examples. “Open access occurs when allowing competition in one segment
of the industry requires ensuring access to the remaining natural monopoly bottlenecks, provided that there
is available capacity.” To prevent the incumbent from precluding competition in other markets, access
regulation or matching price principles may need to be used.
Regulatory Reform: Economic Analysis and British Experience
Cambridge, MA: The MIT Press, 1999, Chapter 9.
Armstrong, Mark, Simon Cowan, and John Vickers
Describes how the U.K. government restructured the country’s electricity sector. Considers the economic
characteristics of the sector and how the government resolved issues of system operation, competition,
industry structure, privatization, transmission pricing, and the role of regulation.
Telecommunications and Power Sector Reforms in Latin America: Lessons Learned
InterAmerican Development Bank (undated).
Belt, Juan A. B.
Describes power sector reform in Argentina and the deregulatory approaches of El Salvador and
Guatemala in telecommunications. Found positive results in all three sets of reform.
Making Competition Work in Electricity
New York: Wiley & Sons, 2002, Chapter 3.
Hunt, Sally
Explains that electricity generation is the major candidate for being made competitive, but the retail
function can also be competitive. Describes four models of industry structure, namely, (1) vertically
integrated monopoly, (2) integrated monopoly buys power from competing generators, (3) a fully
competitive generating sector but with the distribution company having a monopoly over small final
customers, and (4) retail competition. Explains how to determine the appropriate structural change.
Other
Competition for Existing Consumers VS. Competition for NewConsumersCore References
Sectoral ReferencesELECTRICITY
GAS
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Regulatory Reform: Economic Analysis and British Experience
Cambridge, MA: The MIT Press, 1999, Chapter 8.
Armstrong, Mark, Simon Cowan, and John Vickers
Describes how the U.K. government restructured the country’s gas sector. Considers the economic
characteristics of the sector and how the government resolved issues of industry structure, transport,
privatization, competition, price control, and the role of regulation. Provides assessments of the reforms.
Telecommunications and Power Sector Reforms in Latin America: Lessons Learned
InterAmerican Development Bank (undated).
Belt, Juan A. B.
Describes the deregulatory approaches of El Salvador and Guatemala in telecommunications. Found that
minimal regulation led to positive results because networks were undeveloped.
ICT Regulation Toolkit
Washington, D.C.: infoDev and the International Telecommunications Union, 2007, Module 2.
Explains how to identify barriers to entry and essential facilities. Explains remedies for anticompetitive
conduct, such as restricting access to essential facilities and engaging in price squeezes.
What the Transformation of Telecom Markets Means for Regulation
Note no. 121 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 1997.
Smith, Peter
States that regulators need to resolve network interconnection issues, that competition through the sale of
property rights (such as radio spectrum) can eliminate the need for regulation, and that the market can be
regulated in a way more in line with antitrust regulation than with traditional utility regulation.
Urban Bus Toolkit: Tools and Options for Reforming Urban Bus Systems
Public-Private Infrastructure Advisory Facility, World Bank.
CPCS Transcom
Describes how to existing and alternative urban bus systems in developing and transitional countries.
Offers practical advice to enact fundamental system reforms.
Best Methods of Railway Restructuring and Privatization
CFS Discussion Paper Series, number 11, World Bank, Washington, D.C., 1995.
Kopicki, Ron and Louis Thompson
Provides context and guidance to restructure the railways. Addresses distinct structural issues associated
with rail enterprise reform, design of specialized intermediary institutions that carry out much of the work of
railway restructuring, and management techniques that are appropriately adapted to railway reform and
restructuring. Focuses on “best” methods built on seven case studies of recent railway restructuring efforts:
Japan National Railway, New Zealand Railways, Argentina Railways, Swedish Railways, British Railways,
and railroads in the United States, and Canadian Railways.
Regulatory Reform: Economic Analysis and British Experience
Cambridge, MA: The MIT Press, 1999, Chapter 10.
Armstrong, Mark, Simon Cowan, and John Vickers
Describes how the U.K. government reformed the country’s water sector. Considers the economic
characteristics of the sector and how the government resolved issues of vertical structure, horizontal
competition, yardstick competition, price control, service quality, environmental effects, metering, and
privatization. Provides assessments of the reforms.
Competition, Anti-competitive behavior, Efficiency, Cross-subsidization, Access pricing, Unbundling, Market
TELECOMMUNICATIONS
TRANSPORTATION
WATER
Key Words
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foreclosure
Regulating Infrastructure: Monopoly, Contracts, and Discretion
Cambridge, MA: Harvard University Press, 2003, Chapters 10 and 13.
Gómez-Ibáñez, José
Examines the tradeoffs between competition and coordination in policies for vertical unbundling. Considers
the advantages and disadvantages of vertical unbundling, the determinants of vertical integration, and
regulatory mechanisms for improving coordination with unbundling, namely regulated access charges and
markets for capacity rights. Examines how to determine if unbundling is appropriate. Considers costs of
competition, potential for innovation, and industry costs.
The Economics of Regulation: Principles and Institutions
Cambridge, MA: MIT Press, 1988, Reissue Edition, Chapter 6.
Kahn, Alfred
Covers the role and definition of competition. Discusses financial integration and vertical integration of
utilities, conglomerates, horizontal and geographic integration, and intercompany coordination.
Making Competition Work in Electricity
New York: Wiley & Sons, 2002, Chapters 3 and 7.
Hunt, Sally
Explains that electricity generation is the major candidate for being made competitive, but the retail
function can also be competitive. Describes four models of industry structure. Explains how to determine
the appropriate structural change. Examines trading arrangements to ensure access.
Competition in Retail Electricity Supply
DAE Working Paper WP 0227, Department of Applied Economics, University of Cambridge, 2002.
Littlechild, Stephen C.
Explains benefits of retail competition in electricity. Further explains that competition is a process over time
that has important entrepreneurial, learning, and marketing elements. States that not understanding these
features of competition could have contributed to the problems some jurisdictions have experienced with
electricity competition.
Lessons from the California Electricity Crisis
CSEM Working Papers, CSEMWP-110, 2003.
Wolak, F.
Illustrates the relationship between market and regulatory design and the functioning of electricity markets
through the episode of the California electricity crisis during the summer of 2000. Identifies the role of the
regulatory institutions in both the development and resolution of the crisis. Draw lessons and makes
recommendations for preventing such events to occur in the future.
The Impact of Market Rules and Market Structure on the Price Determination Process in the England and Wales
Electricity Market
POWER Working Papers, PWP-047, 1997.
Wolak, F., and R.H. Patrick
Examines how organized market rules affect firms’ market power in the short term. Illustrates the argument
through analysis of the England and Wales electricity market, a market dominated by two generators,
National Power and PowerGen, who compete in price bids and for generation sets and capacity level of
these sets every half an hour. Finds that strategic use of capacity availability declarations gave these two
Main Forms of Market and Transaction OrganizationCore References
Sectoral ReferencesELECTRICITY
Competition in Infrastructure Markets
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generators the opportunity to obtain prices for their output substantially in excess of their marginal costs of
generation.
Competition in the Natural Gas Industry: The emergence of spot, financial, and pipeline capacity markets
Note no. 137 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, March 1998.
Juris, Andrej
Explains that introducing open access to pipeline transportation or unbundling supply from transportation
creates two distinct markets: the gas market, where participants trade natural gas as a commodity and
minimize price and supply risks, and the transportation market, where participants trade transportation
services for shipping gas through the pipeline system. Describes how trades occur in each market and the
importance of assigning property rights.
Privatization, Restructuring, and Regulation of Network Industries
Cambridge, MA: MIT Press, 1999, Chapter 8.
Newbery, David M.
States that one of the unique aspects of the gas industry is that production costs are not well defined.
Furthermore, gas can only be produced at certain sites and can only be transported via pipelines and thus
an initial investment in pipelines must be made in order to serve a particular area. Describes other
characteristics of gas production, such as large start-up costs and large sunk costs. Describes one
possible production chain for the gas industry is that the gas producer sells the gas to pipeline operators,
who deliver the gas to either large customers or local distributors. States that the main instrument for
deregulation of the gas industry has been the development of spot and futures markets for gas.
Regulation, Market Structure and Performance in Telecommunications
OECD-Economic Studies 32: 2001, pp. 99-142.
Boylaud, O., and G. Nicoletti
Uses a database on 23 OECD countries to examine the effects of liberalization and privatization on
productivity, prices and quality of service in long-distance (domestic and international), and mobile cellular
telephony services markets. Found that while liberalization, viewed both as prospective and effective
unambiguously enhances productivity and quality and reduces prices, no clear-cut effect was found for
privatization.
ICT Regulation Toolkit
Washington, D.C.: infoDev and the International Telecommunications Union, 2007, Module 2.
Explains interconnection principles, how to establish and negotiate interconnection arrangements, how to
establish interconnection charges, and technical aspects of interconnection arrangements.
Toolkit on Public-Private Partnerships in Highways
Public-Private Infrastructure Advisory Facility, World Bank.
Groupe Egis and Courdert Brothers
Provides low- and middle- income country guidance in the design and implementation of Public-Private
Partnerships in the highway sector. Covers all types of road projects and both with and without private
funding.
Urban Bus Toolkit: Tools and Options for Reforming Urban Bus Systems
Public-Private Infrastructure Advisory Facility, World Bank.
CPCS Transcom
Describes how to existing and alternative urban bus systems in developing and transitional countries.
Offers practical advice to enact fundamental system reforms.
Port Reform Toolkit, 2nd Edition
GAS
TELECOMMUNICATIONS
TRANSPORTATION
Competition in Infrastructure Markets
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Public-Private Infrastructure Advisory Facility, World Bank.
World Bank Transport Group
Provides guidance for undertaking sustainable and well-considered reforms of public institutions that
provide, direct, and regulate port services in developing countries.
Concessions for Infrastructure: A Guide to Their Design and Award
Finance, Public Sector, and Infrastructure Network, WTP 399, World Bank, Washington, D.C., 1998.
Kerf, Michael et al.
Provides a guide to the complex range of issues and options related to design, award, implementation,
monitoring, and modification of concessions. The main rationale for concessions is that they can facilitate
the regulation of natural monopolies. They can be used to create competition for the market under
conditions in which the service provider has significant market power.
Commercial Management and Financing of Roads
World Bank Technical Paper number 409, World Bank, Washington, D.C., 1998.
Heggie, Ian and Piers Vickers
Holds that the emerging consensus is that commercializaton requires four basic building blocks: a)
establishing responsibility for managing roads; b) creating ownership of roads by involving users in their
management; c) stabilizing road finance by securing an adequate, continual flow of funds; and d)
strengthening management of roads by introducing sound businesses practices
Private Sector Participation in the Water Supply and Wastewater Sector: Lessons from Six Developing
Countries
Directions in Development Series. Washington, D.C.: World Bank, 1996.
Rivera, D.
Investigates six recent experiences in developing countries with private-sector participation in the water
and wastewater sectors. Presents the economic context, the nature of the arrangement between the
government and the private sector, and the impact on service level, quality, and price for each of the six
experiences. Assesses the performance of the private sector and gives some recommendations on how to
increase the likelihood of its success.
Government Opportunism and the Provision of Water
in Spilled Water: Institutional Commitment in the Provision of Water Services, edited by William Savedoff and
Pablo Spiller. Washington, D.C.: Inter-American Development Bank, 1999, pp.1-34.
Savedoff, William, and Pablo Spiller
Presents case studies of Mexico, Chile, and Argentina to provide lessons on market structure for water.
Holds that Mexico shows that decentralization can improve performance and Chile shows that publicly
owned water utilities can improve performance through private subcontracting. Later chapters examine
these cases in more detail.
Economics of Water Resources: From Regulation to Privatization
2nd ed., Natural Resource Management and Policy Series. Dordrecht, Netherlands: Kluwer, 1998.
Spulber, N., and A. Sabbaghi
Presents the fundamentals of the economics of water resources, including the components of water
resource management, the types and quantities of water demand and supply, market processes in water
allocation, the nature of pollutants and their specific impact, the interactions in the economic-ecological
system, and the problem of water re-use and recycling. Discusses the issues of public control through
regulation and enforcement, privatization of water resources, and franchise competition.
Regulatory Reform: Economic Analysis and British Experience
Cambridge, MA: The MIT Press, 1999, Chapters 4-5.
Armstrong, Mark, Simon Cowan, and John Vickers
WATER
Other References
Competition in Infrastructure Markets
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Examines the economics of competition, liberalization, and vertically related markets.
Privatization, Restructuring, and Regulation of Network Industries
Cambridge, MA: MIT Press, 1999, Chapter 5.
Newbery, David M.
Describes how to introduce competition in utility markets.
Competition, Monitoring, Regulation, Efficiency, Risk allocation, Unbundling, Access pricing, Interconnection
Note: Readers should cross-reference this section with Chapter V Sections C and E, and Chapter VI Section C.
Transition Costs: Who Should Pay?
Electricity Journal 10 (5): 1997, pp. 68-77.
Baxter, Lester, Eric Hirst, and Stan Hadley.
Argues that to be efficient, stranded cost recovery mechanisms should not affect customer choice of
suppliers relative to the choices that would be made if there were no stranded costs to be recovered, not
encourage high-cost suppliers to operate instead of low-cost suppliers, not make it profitable for
incumbents to under price a new entrant that has lower costs, encourage incumbents to lower stranded
costs as much as possible, and be simple to administer.
Regulating Infrastructure: Monopoly, Contracts, and Discretion
Cambridge, MA: Harvard University Press, 2003, Chapter 10.
Gómez-Ibáñez, José
Examines the tradeoffs between competition and coordination in policies for vertical unbundling. Considers
the advantages and disadvantages of vertical unbundling, the determinants of vertical integration, and
regulatory mechanisms for improving coordination with unbundling.
The Economics of Regulation: Principles and Institutions
Cambridge, MA: MIT Press, 1988, Reissue Edition, Chapter 6.
Kahn, Alfred
Explains that price flexibility for all operators is important when there is competition. States that if the
regulator refrains from lowering prices to levels where the less-efficient firms are unable to compete, the
regulator in effect is creating a cartel-like situation where prices are based on the costs of the less-efficient
firms. Describes how in some circumstances price discrimination by firms can increase efficiency.
Price Structures, Cross-Subsidies, and Competition in Infrastructure
Note no. 107 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 1997.
Irwin, Timothy
Explains that price discrimination by regulated firms is common and is efficient in some cases. Considers
how price discrimination generally does not withstand competition and cross-subsidies almost certainly do
not. Describes price rebalancing and its effects on customer groups. Examines ways in which the
government can preserve the old price structure through subsidies. Also considers other social safety nets.
The Regulatory Compact and Implicit Contracts: Should Stranded Costs Be Recoverable?
Energy Journal 19(3): 1998, pp. 69-83.
Boyd, J.
Key Words
Transition Aspects to Introducing Competition (Stranded Assets,Subsidized Customers)
Core References
Sectoral ReferencesELECTRICITY
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Applies principles from law and economics to address stranded assets in the electricity sector. Focuses on
theories of efficient breach and implicit contracts to address the desirability of utility cost recovery in the
context of liberalization. Identifies the circumstances under which cost recovery should occur and
concludes that, when called for, this recovery should be partial rather than full.
Making Competition Work in Electricity
New York: Wiley & Sons, 2002, Chapters 3, 5, and 18.
Hunt, Sally
States that in order to introduce competition, there may be a need to buy out the old regime. Examines
effects of private ownership and generation divestiture on stranded costs. Discusses how to quantify
stranded costs, including the bottom-up design and the top-down methods.
Does Stranded Cost Recovery Distort Competition?
Electricity Journal 9 (3), 1996, pp. 31-45. Purchase.
Joskow, Paul L.
Defines stranded costs and describes how to calculate them.
ICT Regulation Toolkit
Washington, D.C.: infoDev and the International Telecommunications Union, 2007, Module 2.
Explains price rebalancing options and gives case studies. Provides illustrative examples of price
rebalancing and describes how to evaluate the welfare effects.
Managing the Regulatory Process: Design, Concepts, Issues, and the Latin America and Caribbean Story
Washington, D.C.: The World Bank Group, 1999, Chapter 7.
Guasch, J. Luis, and Pablo Spiller
Describes transition issues in Latin America and the Caribbean. Considers pricing, market structure,
access, and interconnection.
Results of Railway Privatization in Latin America
Transport Paper Series number 6, World Bank, Washington, D.C., 2005.
Sharp, Richard
Reviews the performance of railway concessions in Latin America from 1991 through 2004. Overall
assessment is positive, particularly for freight railways. Railway traffic volumes have climbed, with some
improvements in surface transport market share. Although numerous data problems exist, measures of
productive efficiency almost uniformly show post-concession improvements in cargo transport. Effects on
rail rates and service levels have generally received positive reviews. Evidence is less extensive for
passenger services, mostly because concessioning was largely limited to commuter services in Argentina
and Brazil and because such concessions must be evaluated in terms of complex subsidy and regulated
pricing regimes, rather than as market-based private enterprises.
Privatization and Regulation of Transport Infrastructure: Guidelines for Policymakers and Regulators
World Bank Institute Development Study, World Bank, Washington, D.C., 2000.
Estache, Antonio
Addresses liberalization of transport policies and the role played by private operators and investors in
transport infrastructure. Provides an overview of why economic regulation is important and examines four
subsectors: airports, ports, railways, and roads. Discusses for each subsector: relevance from the
viewpoint of a regulator; main privatization and regulation trends; price and quality regulation issues that
characterize the sector, and performance indicators that the sector’s regulators should be able to rely on to
be effective in their jobs.
Getting the Private Sector Involved in Water – What to Do in the Poorest of Countries?
TELECOMMUNICATIONS
TRANSPORTATION
WATER
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Note no. 102 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, January 1997.
Brook Cowen, Penelope J.
Examines the transitional issues in water reforms. Considers pricing, contracting, and competition.
Competition, Costs, Cross-subsidization, Price structure, Stranded Costs, Price rebalancing
Competition Policy for Small Market Economies
Cambridge, MA: Harvard University Press, 2003, Chapter 4.
Gal, Michal S.
Explains regulation of monopolies in a small economy context. Defines monopoly and describes
approaches to regulating a pure monopoly (a monopoly that does not also compete against other firms)
and to regulating a monopoly that competes with downstream rivals. Considers the viability of these
downstream rivals.
Regulating Infrastructure: Monopoly, Contracts, and Discretion
Cambridge, MA: Harvard University Press, 2003, Chapters 10 and 13.
Gómez-Ibáñez, José
Examines the tradeoffs between competition and coordination in policies for vertical unbundling. Considers
the advantages and disadvantages of vertical unbundling, the determinants of vertical integration, and
regulatory mechanisms for improving coordination with unbundling, namely regulated access charges and
markets for capacity rights. Examines how to determine if unbundling is appropriate. Considers costs of
competition, potential for innovation, and industry costs.
Privatization, Restructuring, and Regulation of Network Industries
Cambridge, MA: MIT Press, 1999, Chapter 5.
Newbery, David M.
Describes how to introduce competition in utility markets. Considers introducing competition for markets
served by state-owned utilities and issues of vertical separation.
Managing the Regulatory Process: Design, Concepts, Issues, and the Latin America and Caribbean Story
Washington, D.C.: The World Bank Group, 1999, Chapter 11.
Guasch, J. Luis, and Pablo Spiller
Examines reform of the power sector. Considers issues of private participation, regulation of prices, and
power pools. Provides case studies of the U.K., U.S., Chile, Norway, and Argentina.
Regulating Infrastructure: Monopoly, Contracts, and Discretion
Cambridge, MA: Harvard University Press, 2003, Chapter 12.
Gómez-Ibáñez, José
Examines how to design capacity markets, using Argentina as a case study.
Making Competition Work in Electricity
New York: Wiley & Sons, 2002, Chapter 3.
Hunt, Sally
Explains that electricity generation is the major candidate for being made competitive, but the retail
function can also be competitive. Describes four models of industry structure.
Key Words
Vertical Separation and Service UnbundlingCore References
Sectoral ReferencesELECTRICITY
GAS
Competition in Infrastructure Markets
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Competition in the Natural Gas Industry: The emergence of spot, financial, and pipeline capacity markets
Note no. 137 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, March 1998.
Juris, Andrej
Explains that introducing open access to pipeline transportation or unbundling supply from transportation
creates two distinct markets. Describes how trades occur in each market and the importance of assigning
property rights.
Natural Gas Markets in the U.K.: Competition, industry structure, and market power of the incumbent
Note no. 138 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, March 1998.
Juris, Andrej
Describes how deregulation of the U.K. natural gas industry facilitated new entry and competition in almost
all segments, except pipeline transportation. The process of instituting competition has been difficult
because the privatized incumbent was allowed to remain vertically integrated.
Regulation in New Natural Gas Markets—The Northern Ireland Experience
Note no. 179 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, April 1999.
Lehmann, Peter
Argues that a competitive structure may be difficult in new markets. Describes Northern Island’s attempt to
use a period of exclusive licenses to phase in reforms.
Structural Separation in Telecommunications: A Review of Some Issues
Agenda, 10(1): 2003, pp. 43-60.
Henderson, A., and S. Dounoukos
Discusses the trade-offs involved in structural separation and divestiture of the access network activities
from the non-access activities of incumbent telecommunications operators. Presents alternative approaches
of countering anticompetitive behavior of incumbents based on accounting separation. Reports on the
Australian experience with these issues.
ICT Regulation Toolkit
Washington, D.C.: infoDev and the International Telecommunications Union, 2007, Module 2.
Holds that incumbents control essential facilities. Regulators often require incumbents to unbundle these
essential facilities and provide rivals access to them. Examples of such policies include local loop
unbundling and collocation. Explains that in extreme cases, regulators may require incumbents to divest
themselves of essential facilities.
Methods for Increasing Competition in Telecommunications Markets
University of Florida, Department of Economics, PURC Working Paper, 2008.
Jamison, Mark A.
Describes regulatory remedies to issues with vertical integration and market concentration.
Competition in Telecommunications
Cambridge, MA: MIT Press, Chapter 1.
Laffont, Jean-Jacques, and Jean Tirole
Provides a background on the technology and regulatory policy debate in the new telecommunications
competitive environment.
Developing Best Practices for Promoting Private Sector Investment in Infrastructure
Five volume set, including: Roads, Airports and Air Traffic Control, Ports, Water, and Power. Asian Development
Bank, Washington, D.C., 2000.
Asian Development Bank
Presents findings of a study on best practices for promoting private sector participation in key infrastructure
TELECOMMUNICATIONS
TRANSPORTATION
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sectors. The best practices cover the role of government, institutional reform, strategic planning, legal and
regulatory frameworks, unbundling and competition, contractual arrangements, sources of financing, and
the allocation of risk. Each volume is divided into two parts. Part 1 presents an overview of the study
covering the growth of private sector infrastructure investment in Asia, cross-sectoral issues, and a
summary of the best practices for each sector. Part 2 comprises the specific sector report.
Port Reform Toolkit, 2nd Edition
Public-Private Infrastructure Advisory Facility, World Bank.
World Bank Transport Group
Provides guidance for undertaking sustainable and well-considered reforms of public institutions that
provide, direct, and regulate port services in developing countries.
Federal Railways Restructuring and Privatization Project
Implementation Completion and Results Report, number 25241, World Bank, Washington, D.C., 2003.
World Bank
Reports results of restructuring Brazil’s railway system. An important lesson is that addressing the
redundancy issue upfront, and initiating a well-designed staff retrenchment program can be an effective
instrument to minimize the impacts of restructuring, and to reduce opposition to such project. Other lessons
convey the need for an established regulatory framework prior to initiating a privatization program, as in
this case, a broader (geographical) restructuring of the public railways would have been needed to allow
for more efficient private operations.
Essential facility, Bottleneck facility, Vertical separation, Vertical integration, Unbundling
Valuation and Costing Issues in Access Pricing with Specific Applications to Telecommunications
in Infrastructure Regulation and Market Reform: Principles and Practice, edited by Margaret Arblaster and Mark
Jamison. Canberra, Australia: ACCC and PURC, 1998, pp. 91-112.
Ergas, H.
Holds that, with respect to the costing of access pricing, assets should be valued at replacement cost,
using, whenever possible, entry prices for in-use assets; efficient recovery of common costs will require a
mark-up over the attributable long-run costs of each service; and the cost of capital benchmarks need to
reflect the effect of irreversibility in investment. Advocates ECPR.
The Theory of Access Pricing: An Overview for Infrastructure Regulators
Centre for Economic Policy Research Discussion Paper 2133, London, 1999.
Estache, A., and T. Valetti
Provides an overview of theoretical issues related to the pricing of access that are at the heart of the policy
debate on reforms of infrastructures. Discusses in detail the importance of access pricing in the context of
a liberalized and vertically separated industry, a liberalized but vertically integrated industries, and
unregulated access (private negotiations).
A Primer on Access Regulation and Investment
in Infrastructure Regulation and Market Reform: Principles and Practice, edited by Margaret Arblaster and Mark
Jamison. Canberra, Australia: ACCC and PURC, 1998, pp. 150-160.
Gans, J. and Williams, P.
Holds that access prices exert an influence on investment incentives by directly affecting the rate-of return
on the provider’s investment. States that for regulation to be most effective, pricing policy must be stated
prior to access being sought and indeed, prior to investment being made. In an unregulated environment,
providers will limit optimal use of the facility so as to limit profit-reducing competition downstream.
Key Words
Access Pricing and Regulation of Access to Bottleneck FacilitiesCore References
Competition in Infrastructure Markets
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Managing the Regulatory Process: Design, Concepts, Issues, and the Latin America and Caribbean Story
Washington, D.C.: The World Bank Group, 1999, Chapter 6.
Guasch, J. Luis, and Pablo Spiller
Examines access pricing. Considers fully distributed cost, access deficit, ECPR, marginal cost, and price
caps for telecommunications. Considers timetabling issues for energy.
Regulating Infrastructure: Monopoly, Contracts, and Discretion
Cambridge, MA: Harvard University Press, 2003, Chapter 12.
Gómez-Ibáñez, José
Examines how to design capacity markets, using Argentina as a case study.
Making Competition Work in Electricity
New York: Wiley & Sons, 2002, Chapters 7 and 9.
Hunt, Sally
States that detailed rules for assuring access to essential facilities—the trading arrangements—must take
into account the problems of delivery. Further holds that trading arrangements must be made regarding
how forward contracts are delivered and how spot sales are made and delivered. Describes three models
of short-term trading arrangements, namely the integrated, wheeling, and decentralized models. Advocates
the integrated model. Says market participants need to be assured that they will have access to use the
transmission system on stable terms in the future. States that an ideal transmission pricing scheme is
comprised of three parts: a transmission usage charge, a transmission connection charge, and a
transmission access charge.
Model Interconnection Procedures and Agreement for Small Distributed Generation Resources
Washington, D.C.: National Association of Regulatory Utility Commissioners, 2003.
NARUC
This report provides a systematic overview of the issues that need to be addressed when small distributed
generation equipment are to be connected to the electricity system. A number of States, including
California, Texas, New York, and Ohio have completed distributed generation (DG) interconnection
procedures and agreements for small generators after extensive stakeholder processes. Other States have
begun to consider how to implement DG. The National Association of Regulatory Utility Commissioners
(NARUC) has adopted a number of principles, policies, and resolutions recognizing the importance of DG
to the nation’s energy systems. The report includes a Glossary of Terms, Codes and Standards,
Certification procedures, and a Model Agreement.
Competition in the Natural Gas Industry: The emergence of spot, financial, and pipeline capacity markets
Note no. 137 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, March 1998.
Juris, Andrej
Explains that introducing open access to pipeline transportation or unbundling supply from transportation
creates two distinct markets: the gas market, where participants trade natural gas as a commodity and
minimize price and supply risks, and the transportation market, where participants trade transportation
services for shipping gas through the pipeline system. Describes how trades occur in each market and the
importance of assigning property rights
Natural Gas Markets in the U.K.: Competition, industry, structure, and market power of the incumbent
Note no. 13 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, March
1998. Juris, Andrej
Describes how deregulation of the U.K. natural gas industry facilitated new entry and competition in almost
all segments, except pipeline transportation. The process of instituting competition was difficult because the
Sectoral ReferencesELECTRICITY
GAS
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privatized incumbent was allowed to remain vertically integrated. Eventually, the incumbent voluntarily split
into two companies. Resulting access contracts are discussed.
ICT Regulation Toolkit
Washington, D.C.: infoDev and the International Telecommunications Union, 2007, Module 2.
Explains interconnection principles, how to establish and negotiate interconnection arrangements, how to
establish interconnection charges, and technical aspects of interconnection arrangements.
Regulatory Techniques for Addressing Interconnection, Access, and Cross-Subsidy in Telecommunications
in Infrastructure Regulation and Market Reform: Principles and Practice, edited by Margaret Arblaster and Mark
Jamison. Canberra, Australia: ACCC and PURC, 1998, pp. 113-129.
Jamison, M.
Explains that regulators generally consider three basic approaches when setting prices for interconnection
and access: (1) the ECPR; (2) cost-based pricing; and (3) demand-based pricing or Global Price Caps.
Further explains that the basic theory behind the ECPR is that, if the incumbent receives the same profits
from interconnection and access as it does from sales of the retail product, then competitors can enter the
market only if they are more efficient in providing retail functions than is the incumbent. In cost-based
pricing, regulators generally choose a long-run-incremental-cost-plus-contribution approach. The demand-
based approach uses Ramsey-Boiteux pricing principles.
Competition in Telecommunications
Cambridge, MA: MIT Press, Chapters 3-5.
Laffont, Jean-Jacques, and Jean Tirole
Describes economic pricing principles for one-way and two-way access. Provides both narrative
explanation and technical descriptions.
The Theory of Access Pricing
Policy, Research Working Paper 2097, World Bank, Washington, D.C., 1999.
Valletti, Tommaso and Antonio Estache
Discusses access pricing which is an important component of a regulatory environment guaranteeing that
competitors have access to the services of potential “bottleneck” facilities too costly to duplicate. Rules
covering fair access to these facilities – including fair access prices - generally improve economic
efficiency by easing competition in markets both upstream and downstream from the bottleneck.
Appropriate access pricing rules are especially needed when a dominant firm controls the supply of one or
more inputs – for example, gas transportation, electricity transmission, local telecommunication access, or
railway track — vital for its competitors.
Best Methods of Railway Restructuring and Privatization
CFS Discussion Paper Series, number 11, World Bank, Washington, D.C., 1995.
Kopicki, Ron and Louis Thompson
Provides context and guidance to restructure the railways. Addresses distinct structural issues associated
with rail enterprise reform, design of specialized intermediary institutions that carry out much of the work of
railway restructuring, and management techniques that are appropriately adapted to railway reform and
restructuring. Focuses on “best” methods built on seven case studies of recent railway restructuring efforts:
Japan National Railway, New Zealand Railways, Argentina Railways, Swedish Railways, British Railways,
and railroads in the United States, and Canadian Railways.
Price Regulation of Access to Telecommunications Networks
Department of Economics, Boston University (undated).
Vogelsang, Ingo
Provides an overview of the economic research on telecommunications interconnection pricing.
TELECOMMUNICATIONS
TRANSPORTATION
Other References
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Access pricing, Cost of capital, Competition, Investment, Ramsey Pricing, Incremental Costs, Interconnection,
Unbundling
Concurrent Competition Powers in Sectoral Regulation: A Report by the Department of Trade and Industry and
HM Treasury
United Kingdom, 2006.
Department of Trade and Industry
Examines the interface between the competition authority and sector regulators in the U.K. Considers how
regulators balance their concurrent competition powers against their sector-specific regulatory powers and
how regulators that have concurrent competition powers use these powers.
Competition Policy for Small Market Economies
Cambridge, MA: Harvard University Press, 2003, Chapters 2 and 4.
Gal, Michal S.
Examines the implications of small economy size on competition policy. Explains regulation of monopolies
in a small economy context. Defines monopoly and describes approaches to regulating a pure monopoly (a
monopoly that does not also compete against other firms) and to regulating a monopoly that competes with
downstream rivals. Considers the viability of these downstream rivals.
Managing the Regulatory Process: Design, Concepts, Issues, and the Latin America and Caribbean Story
Washington, D.C.: The World Bank Group, 1999, Chapters 14-15.
Guasch, J. Luis, and Pablo Spiller
Examines competition policies with an emphasis on Latin America. Considers the relationship between
regulation and competition policy. Further considers regulating market structure, competition law and its
enforcement, and the role of the judiciary. Examines cases of Chile and Peru.
Competition Policy for Regulated Utility Industries in Britain
Oxford Applied Economics Discussion Paper Series: 178, 1996.
Nutall, R., and J. Vickers
Provides a theoretical and a descriptive approach to the role of competition policy in regulated utilities.
First, it outlines the main features of public utilities hampering the application of competition policy. Then, it
analyzes the principles and practice of competition policy related to price-discrimination, cross-
subsidization, horizontal and vertical integration, and access pricing. Finally, it describes the British
experience in those areas.
Competition Law and Policy — Theoretical Underpinnings
in Infrastructure Regulation and Market Reform: Principles and Practice, edited by Margaret Arblaster and Mark
Jamison. Canberra, Australia: ACCC and PURC, 1998, pp. 16-26.
Smith, R.
Holds that competition policy and competition law are not about removing or outlawing monopolies, but are
based on the belief that a competitive market will result in economic efficiency and increased social
welfare. Examines types of conduct: a) contracts, arrangements and understandings between competitors;
b) misuse of existing market power; c) exclusive supply arrangements and other vertical relationships (such
as resale price maintenance); and d) mergers and acquisitions. Describes the typical structure-conduct-
performance paradigm and advocates considering the dynamic interplay between current sellers and
Key Words
Application of Competition Rules and Antitrust Principles inRegulation and Models of Interaction With Competition/AntitrustAuthoritiesCore References
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potential entrants.
Looking for Trouble: Competition Policy in the U.S. Electricity Industry
CSEM Working Papers, CSEMWP-109, 2003.
Bushnell, J.
Discusses the shift in focus of electricity regulators from fostering a competitive market structure towards
applying regulation to specific market outcomes since the summer 2000 California crisis. Investigates the
extent to which this event is a failure of the policy or of the tools that were used to implement it. Describes
the methods used by regulators to test for potential abuse of market power.
Mitigating Market Power in Electricity Networks
prepared for a conference titled “Towards a European Market of Electricity: What Have We Learnt from Recent
Lessons? Spot Market Design, Derivatives and Regulation” held in Rome, June 2002.
Newbery, D.
Examines four features of the policy that mitigates market power in European electricity networks: capacity
divestiture, entry stimulation, network interconnection, and capacity to apply regulation to the competitive
generation segment. Shows how each of these actions taken separately can improve competition in
wholesale electricity markets, but also how, unless carefully designed, this can be in conflict with another
action with possibly long-term undesirable consequences. Lessons are drawn from California, the UK, and
other European countries.
ICT Regulation Toolkit
Washington, D.C.: infoDev and the International Telecommunications Union, 2007, Module 2.
Explains that governments adopt competition policies to respond to market failures. Intervention through
competition policy may try to modify the behavior of firms or may try to control market structure. Holds that
regulation can be both prospective (control future behavior) and retrospective (respond to past behavior).
Competition policy is generally retrospective. Regulatory agencies sometimes coordinate activities with
competition authorities and at other times serve as the competition authority.
Analyzing Telecommunications Market Competition: A Comparison of Cases
University of Florida, Department of Economics, PURC Working Paper, 2009.
Jamison, Mark, Sanford Berg, and Liangliang Jiang
Describes how U.S. telecommunications regulators and U.K. telecommunications regulators assess market
power. Also describes steps Japan has taken to increase telecommunications competition.
Competition in the Provision of Fixed Telephony Services
Director General of Telecommunications, Office of Telecommunications, London, U.K., 2001.
Oftel
Describes the U.K. telecommunications regulator’s approach for protecting consumers in markets where
competition is currently ineffective in constraining prices. States that the regulator first defines the relevant
markets, then assesses the level of competition in each relevant market, and then determines the extent to
which regulation is necessary in that market.
Telecommunications Regulations: Institutional Structures and Responsibilities
Working Paper no. 237, Organization for Economic Co-operation and Development (OECD), Washington, D.C.,
26 May 2000.
Min, Wonki
States that as the role of the competition authority has grown in telecommunications, the possibility of
inconsistent regulatory rulings has increased. Holds that the principle of lex specialis usually applies. The
three primary models for ensuring concurrent jurisdiction are: (1) Give full regulatory power to the
competition authority (e.g., New Zealand); (2) Give the telecommunication regulator authority to apply
Sectoral ReferencesELECTRICITY
TELECOMMUNICATIONS
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competition rules to the telecommunication sector (e.g., U.K.); and (3) Establish a co-ordination mechanism
to resolve competition issues. A number of countries have formal co-ordination mechanisms, for example,
Switzerland.
Law and Economic Regulation in Transportation
Quorum Books. 1986.
Dempsey, Paul Stephen
Provides an overview of the development of transportation law in the United States in the last century.
Traces the origins of economic regulation, the changing role of regulators, and the effects of deregulation.
Economic regulations are separated into three areas: policing entry and exit from transportation, efforts to
keep rates just, reasonable, and nondiscriminatory, and mergers, consolidations, antitrust, and other issues.
Competition Policy: History, Theory and Practice
Cheltenham, U.K.: Elgar, 2001.
Neumann, Manfred
Provides an international perspective on the development of competition policy, its underlying theories, and
its application.
Economics of Regulation and Antitrust
Cambridge, MA: MIT Press. 2000, Chapter 1.
Viscusi, W. Kip, John M. Vernon, and Joseph E. Harrington, Jr.
Contrasts regulation and competition policy.
Competition, Monopoly, Market Power, Regulation, Antitrust
Opening the Philippine Telecommunications Industry to Competition, Part I, and Opening the Philippine
Telecommunications Industry to Competition, Part II
The World Bank, May 2000.
Aldaba, Rafaleta A.M.
Innovation, Incentives and Competition: A new deal for the water industry
London, U.K.: European Policy Forum, 2009.
Ballance, Tony, Ian Byatt, Martin Cave, Ronan Palmer and Alan Sutherland
Independent Review: of competition and innovation in Water Markets
Norwich, U.K.: Crown Copyright 2008.
Cave, Martin
Managing the Introduction of Competition
in Proceedings of the SAFIR Workshop on Regulatory Strategy, S. K. Sarkar, editor, New Dehli, India: Tara
Energy Research Institute, 2001, pp. 25-34.
Au, M. H.
Northern Electricity Distribution Service in Northern Namibia: A Case Study in the Private Provision of Rural
Infrastructure
July 31, 2002.
Econ One Research, Inc. and EMCON Consulting Group
Regulatory Reforms in India: Effectiveness, Efficiency, and Impacts
The Energy and Resources Institute, New Delhi, India, 2003.
Garg, A., M. Kabra, and R. Kacker
TRANSPORTATION
Other References
Key Words
Case Studies
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Death of the Standard Model for Power Sector Reform in Less Developed Countries and the Emergence of
Hybrid Power Markets
Working Paper, Management Program in Infrastructure Reform & Regulation, University of Cape Town Graduate
School of Business, 2008.
Gratwick, Katharine Nawaal, and Anton Eberhard
U.S. Experiences with Business Separation in Telecommunications
University of Florida, Department of Economics, PURC Working Paper, 2008.
Jamison, Mark A., and James Sichter
Introducing Competition into the Electricity Supply Industry in Developing Countries: Lessons from Bolivia
August 2000.
Joint UNDP/World Bank Energy Sector Management Assistance Programme
Report on the Effectiveness of Competition in Hong Kong’s Telecommunications Market: An International
Comparison
June 2003.
Office of Telecommunications Authority, Hong Kong (OFTA)
Determination Notice: Assessment of Dominance in Mobile Call Termination
OUR, Kingston, Jamaica, September 2, 2004.
Office of Utilities Regulation
Competition Law and Policy in the United States
United States Department of Justice (undated).
Pittman, Russell
Privatization of Electricity Distribution: The Orissa Experience
Tata Energy Research Institute, New Delhi, India, 2003. Purchase.
Ramanathan, K. and S. Hasan
Concurrency or Convergence? Competition and Regulation Under the Competition Act of 1998
in Utility Regulation and Competition Policy edited by Colin Robinson, Cheltenham, UK: Edward Elgar Publishing
Limited, 2002, pp. 164-175.
Sharpe QC, Tom
Economic Analysis of Interconnection Charge Policy: A Report by Strategic Policy Research, Inc. for OSIPTEL
February 12, 1999.
Strategic Policy Research
A Model for Calculating Interconnection Costs in Telecommunications
Washington, D.C.: PPIAF and the World Bank, 2004.
Um, Paul Naumba, Laurent Gille, Lucile Simon, Christophe Rudelle
Competition for the Market
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Monopoly and Market Power
Competition in Infrastructure
Markets
Competition for the Market
You're in the section: Market Structure and Competition -> Annotated Reading List -> Competition for the
Market
Understanding Regulation: Theory, Strategy, and Practice
New York: Oxford University Press, 1999, Chapter 20.
Baldwin, Robert, and Martin Cave
Examines both commercial and government franchising. Discusses methods of allocating franchises, such
as auctions, and problems with franchises. Problems include specifying the franchised service, ensuring
efficient competition for the market, enforcement, and terminating contracts.
Franchising and Privatization
Note no. 40 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 1995.
Dnes, Antony W.
Explains that franchise bidding is one way of having competition for the market when the market exhibits
natural monopoly characteristics. Holds that the scheme can provide low prices for customers if the bid is
for retail prices that will be charged.
Granting and Renegotiating Infrastructure Concessions: Doing It Right
Washington, D.C.: The World Bank Group, 2004, Chapters 2 and 7, Chapters 1-2.
Guasch, J. Luis
Provides an overview of concessions, including how they work, benefits, drawbacks, and experiences.
Managing the Regulatory Process: Design, Concepts, Issues, and the Latin America and Caribbean Story
Washington, D.C.: The World Bank Group, 1999, Chapters 8-9.
Guasch, J. Luis, and Pablo Spiller
Examines franchising and concessions. Examines cases in Argentina, Mexico, and Chile. Describes how to
design concession arrangements.
Concessions – The Way to Privatize Infrastructure Sector Monopolies
Note no. 59 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 1995.
Guislain, Pierre, and Michel Kerf
States that concession-type arrangements can be used for privatizing sectors with monopoly
characteristics. Under this approach, the government grants the private sector the right to provide the utility
service, but retains some control through a concession contract or license. The continuum of private
participation options ranges from short-term supply and service contracts to concessions to full
Competition for the Market
General Concepts and Efficiency ImpactsCore References
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Competition for the Market
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privatization.
Regulatory Reform, Competition, and Innovation – A Case Study of the Mexican Road Freight Industry Policy
Research Working Paper number 2318, World Bank, Washington, D.C., 2000.
Dutz, Mark, Aydin Hayri, and Pablo Ibarra
Case study of Mexico of how innovations in road freight services affect selected downstream users of
those services after regulatory reform.
Toolkit on Public-Private Partnerships in Highways
Public-Private Infrastructure Advisory Facility, World Bank.
Groupe Egis and Courdert Brothers
Provides low- and middle- income countries guidance in the design and implementation of Public-Private
Partnerships in the highway sector. Covers all types of road projects and both with and without private
funding.
Urban Bus Toolkit: Tools and Options for Reforming Urban Bus Systems
Public-Private Infrastructure Advisory Facility, World Bank.
CPCS Transcom
Provides guidance on evaluating existing and alternative urban bus systems in developing and transitional
countries. Offers practical advice to enact fundamental system reforms.
Water Sector Contracts in Mexico City, Mexico
in Thirsting for Efficiency: The Economics and Politics of Urban Water System Reform, Washington, D.C.: The
World Bank, 2002, pp. 139-187.
Haggarty, Luke, Penelope Brook, and Ana Maria Zuluaga
Describes water service contracts in Mexico. Illustrates the use of multiple operators to provide competitive
pressure. Considers the motivations for the water sector reforms, the policy decisions, and policy changes.
Improving Water Services through Competition
Note no. 164 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, December 1998.
Webb, M., and Ehrhardt, D.
States that many major water sector reforms in recent years have used competition for the market as an
efficient way of introducing private sector participation, and the approach has delivered benefits to
consumers. Holds that competition forces the bidders to reveal the minimum cost of providing water and
sanitation, allowing efficiency gains to be realized and passed on to consumers. Competition for the market
can be combined with other forms of competition. Requiring the concessionaire to contract out many
services can keep up the pressure for efficiency during long-term contracts. And comparative competition
between the concessionaire and other utilities can boost performance.
Privatization: An Economic Analysis
Cambridge, MA: MIT Press, 1988, Chapter 3.
Vickers, John, and George Yarrow
Describes the effects of competition.
Competition for the market, Monopoly, Franchise
Sectoral ReferencesTRANSPORTATION
WATER
Other References
Key Words
Basic Auction TheoryCore References
Competition for the Market
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Auction Theory: A Guide to the Literature
in The Economic Theory of Auctions, vol. 1. Cheltenham, U.K.: Elgar, 2000, pp. 3-62.
Klemperer, P.
Surveys in a non-technical way the main topics related to auction theory and the development of its
literature in the last decades. Introduces the basic analysis of optimal auctions, the revenue equivalence
theorem, and marginal revenues. Covers more detailed topics with a specific attention devoted to those
related to those related to competition-policy. Provides some technical details through some simple worked
examples.
What Really Matters in Auction Design
Journal of Economic Perspectives 16(1): 2002, pp. 169-89.
Klemperer, P.
Gives examples where auction design failed to guarantee the absence of anti-competitive behavior, mainly,
collusion, predation and entry deterrence. Highlights the drawbacks of the most popular auction models
and proposes some solutions. Emphasizes the need for stronger antitrust policy in auction markets.
Auctions Too Good To Be True
2011.
Decarolis, Francesco and Klein, Michael
Auctions are supposed to be the most effective means of securing the best deals for infrastructure
concessions. Yet it is well known that bidders sometimes behave strategically by, for example, low-balling
bids in anticipation of contract renegotiation. Various solutions to this problem have been tried in several
countries, including Colombia, Italy, China, Chile, Japan, Peru and Taiwan, but it turns out that these new
auction designs give rise to new forms of strategic bidding behavior, which create even bigger problems.
Using standard procedures like first price sealed bid auctions remains best practice as long as well-
established disciplines for pre-qualification and control of post-bid behavior are maintained.
Auctions and Trading in Energy Markets — An Economic Analysis
Working Papers in Economics, Department of Applied Economics, University of Cambridge, U.K., 2002.
Newbery, D., and T. McDaniel
Shows how auction design is an important issue in the operation and planning in British energy markets.
Discusses the adjustments in the trading arrangements in the electricity industry, and presents some of
their results to date. Looks at the merit of auctions in replacing regulation to manage natural monopolies in
energy markets.
Auctions to Gas Transmission Access: The British Experience
Auctions and Beauty Contests: A Policy Prospective, SEOR-Erasmus Competition and Regulation Institute,
Rotterdam, 2002.
McDaniel, T., and K. Neuhoff
Investigates whether auctioning access rights is an adequate way of managing transmission constraints in
natural gas networks. Describes the evolution of the liberalization process of the gas industry in the UK
and argues that auctioning entry rights improves allocative efficiency provided that competitive production
and supply markets exist. Expresses some reserve about the adequacy of auctioning mechanisms when
deciding about transmission capacity expansion.
Analyzing the Airwaves Auction
Journal of Economic Perspectives 10(1): 1996, 159-75.
McAfee, R., and J. McMillan
Explains the details of the design of the U.S. Federal Communications Commission spectrum license
auction in light of the economic theory of auctions. Describes how auction theory helped address policy
Sectoral ReferencesELECTRICITY
GAS
TELECOMMUNICATIONS
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questions such as the type of auction to be run, the timetable and the bidding strategies, which would best
guarantee efficiency in its final outcome. Shows how this auction has encouraged further theoretical
advances.
Multidimensionality and Renegotiation: Evidence from Transport-Sector Public-Private-Partnership Transactions
in Latin America Policy
Research Working Paper number 4665, World Bank, Washington, D.C., 2008.
Estache, Antonio, Jose-Luis Guasch, Atsushi Iimi, and Lourdes Trujillo
Using auction data from road and railway concessions in Latin America, the analysis shows that the
renegotiation risk in infrastructure concessions increases when multidimensional auctions are used. Good
governance, particularly anti-corruption policies, can mitigate the renegotiation problem.
Auction, Bidding, Value
Granting and Renegotiating Infrastructure Concessions: Doing It Right
Washington, D.C.: The World Bank Group, 2004, Chapters 2 and 7, Chapters 2 and 7.
Guasch, J. Luis
Provides an overview of concessions, including how they work, benefits, and drawbacks. Provides
guidelines for optimal concession design, including award processes, award criteria, renegotiation clauses,
concession length, commitments, tariffs and other financial issues, and dispute resolution.
Bidding for Concessions – The Impact of Contract Design
Note no. 158 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 1998.
Klein, Michael
Explains that concession contracts should set out the rights and performance obligations of
concessionaires and the risks and incentives under which they operate, including pricing arrangements.
The clarity with which these terms can be defined affects the likelihood of renegotiation after contract
award. The design of incentives and risk allocation will affect first the intensity of competition and then the
sustainability of the original contract.
Designing Auctions for Concessions: Guessing the Right Value to Bid and the Winner’s Curse
Note no.160 in Public Policy for the Private Sector, Washington, D.C.: World Bank Group, 1998.
Klein, Michael
Explains that the choice of auction method is affected by arguments about the political sustainability of the
outcome; firms’ bidding strategies, including the risk of the winner’s curse; and the risk of collusion among
bidders. All these ingredients combine to determine whether an auction design yields value; how that value
is distributed among bidders, consumers, and the government; and whether the deal will last.
Competition in Network Industries – Where and How to Introduce It
Note no. 104 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 1997.
Klein, Michael, and Philip Gray
Explains that regulation may be necessary with franchising to allow prices to adjust in response to events,
though rebidding the franchise periodically allows the regulator a way around typical price regulation. If
there are significant fixed costs involved, then the necessary transfer of assets will involve complex asset
valuation exercises. Term limits on the franchise and some rebidding can ensure regular challenges to the
incumbent.
Back to the Future: The Potential in Infrastructure Privatization
TRANSPORTATION
Key Words
Practical Applications of Competition for the MarketCore References
Competition for the Market
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Note no. 30 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 1994.
Klein, Michael, and Neil Roger
States that because monopolies can extract excessive profits, a sustainable ownership arrangement
requires a rent-sharing system that protects consumers, provides owners with incentives to operate the
network efficiently, and reduces the temptation for governments to exploit monopoly rents for political
advantage. Holds that monopolies can be subjected to competition through repeated franchise bidding,
under which monopoly service franchises are auctioned off from time to time and awarded to the firm
offering acceptable service on the best terms. Franchise bidding can be effective for infrastructure services
that do not require investments tied to a particular service area—for example, many forms of transport
services or solid waste collection.
The Case-by-Case Approach to Privatization: Techniques and Examples – Privatization Toolkits.
World Bank Technical Paper No. 403, Washington, D.C., 1998.
Welch, Dick, and Olivier Fremond
In the context of sale of a state-owned enterprise, discusses how to prepare for and organize an auction.
Auctioning Subsidies for Rural Electrification in Chile
Note no. 214 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 2000.
Jadresic, Alejandro
Describes how Chilean regional governments allocate subsidy funds to private companies to help cover
investment costs. These funds are allocated to proposed projects on the basis of a project cost-benefit
analysis, the amount of investment covered by the companies, and the social impact of the project. Rural
communities lacking electricity supply typically propose the projects along with distributors interested in
providing the service. Describes sources of competition.
Auctions to Gas Transmission Access: The British Experience
Auctions and Beauty Contests: A Policy Prospective, SEOR-Erasmus Competition and Regulation Institute,
Rotterdam, 2002.
McDaniel, T., and K. Neuhoff
Describes how and under what conditions auctioning access rights in gas can increase efficiency relative to
negotiation and grandfathering. Uses British gas network as a case study.
On the Design and Implementation of the GSM Auction in Nigeria – the World’s First Ascending Clock
Spectrum Auction
Telecommunications Policy, 27(5-6): 2003, pp. 383-405.
Doyle, Chris, and Paul McShane
Describes the Nigerian GSM auction. Considers auction design, revisions to the design, and management
of the auction.
Extending Telecommunications Service to Rural Areas—The Chilean Experience: Awarding subsidies through
competitive bidding
Note no. 105 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, February 1997.
Wellenius, Björn
Describes how Chile auctions subsidies for rural telecommunications. Considers overall design of the
process and the results.
Introducing Telecommunications Competition through a Wireless License: Lessons from Morocco
Note no. 199 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, November 1999.
Wellenius, Björn, and Carlo Maria Rossotto
Describes how Morocco auctioned a GSM license. Describes the process transparency and how it affected
Sectoral ReferencesELECTRICITY
GAS
TELECOMMUNICATIONS
Competition for the Market
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results.
Road Infrastructure Concession Practice in Europe
French Highway Directorate, Paris, 2001.
Bousquet, Franck and Alain Fayard
Reviews road infrastructure concessions in Europe with special emphasis on the role of public authorities
as overseers of the concessions.
Federal Railways Restructuring and Privatization Project
Implementation Completion and Results Report, number 25241, World Bank, Washington, D.C., 2003.
World Bank
Reports results of restructuring Brazil’s railway system. An important lesson is that addressing the
redundancy issue upfront, and initiating a well-designed staff retrenchment program can be an effective
instrument to minimize the impacts of restructuring, and to reduce opposition to such project.
Expanding Water and Sanitation Services to Low-Income Households
Note no. 178 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 1998.
Komives, Kristin, and Penelope J. Brook Cowen
Describes the La Paz and El Alto concession. Instead of asking bidders to specify the tariff they would
require to meet pre-specified investment and service obligations as did earlier concession awards in the
region, bidders for the this concession identified the number of water connections they would make in
exchange for a pre-specified tariff.
Improving Water Services through Competition
Note no. 164 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, December 1998.
Webb, M., and Ehrhardt, D.
States that competition for the market as an efficient way of introducing private sector participation and the
approach has delivered benefits to consumers. Describes special issues for small towns where the costs of
preparing a tender and of preparing bids are disproportionate to their size. Describes how several small
towns join together to overcome this problem. Competition for the market can be combined with other
forms of competition. Examines requiring the concessionaire to contract out services and using
comparative competition between the concessionaire and other utilities.
Competition, Franchising, Bidding, Natural Monopoly, Contract
Post-Privatization Renegotiation and Disputes in Chile
IFM-116, Washington, D.C.: Inter-American Development Bank, September 1999.
Basanes, Federico C., Eduardo Saavedra, and Raimundo Soto
Describes Chile’s experience, which illustrates the importance of the design of the post-privatization
market, the regulatory framework, and the institutional capabilities the regulator. Explains that disputes
most often occur where regulation is incomplete, information asymmetry is high and regulatory institutions
are less able to monitor the private operators. Conflict stemmed mostly from: (a) the existence of vertical
integration, (b) the lack of definition of certain areas in regulation; and (c) the institutional weaknesses of
regulatory bodies. Describes how a large vertically integrated conglomerate used its market power in the
regulated market to reduce competition and raise its profits in the competitive segment.
Regulating Infrastructure: Monopoly, Contracts, and Discretion
Cambridge, MA: Harvard University Press, 2003, Chapter 5.
TRANSPORTATION
WATER
Key Words
Termination, Renewal, Rebidding and RenegotiationCore References
Competition for the Market
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Gómez-Ibáñez, José
Discusses the problems of having incomplete contracts. Uses case of railroads in Argentina.
Granting and Renegotiating Infrastructure Concessions: Doing It Right
Washington, D.C.: The World Bank Group, 2004, Chapters 2 and 7, Chapters 3-6.
Guasch, J. Luis
Describes renegotiation problems, why they arise, and how to engage in renegotiation.
Managing the Regulatory Process: Design, Concepts, Issues, and the Latin America and Caribbean Story
Washington, D.C.: The World Bank Group, 1999, Chapter 8.
Guasch, J. Luis, and Pablo Spiller
Examines franchising and concessions. Examines cases in Argentina, Mexico, and Chile.
Rebidding for Concessions
Note no. 161 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 1998.
Klein, Michael
Explains that the longer a concession lasts, the less effect the initial rounds of bidding will have on the
concession over its full life. Periodic renegotiations or price reviews will be more influential. Holds that the
market power of concessionaires can be limited by periodically re-auctioning a concession if contracts can
be well written and rebidding is practical.
Rebidding for concession-type arrangements is sometimes called a Chadwick-Demsetz auction.
Reforming Water Supply in Abidjan, Côte D’Ivoire: A Mild Reform in a Turbulent Environment
in Thirsting for Efficiency: The Economics and Politics of Urban Water System Reform, Washington, D.C.: The
World Bank, 2002, pp. 233-272.
Ménard, Claude, and George R.G. Clarke
Examines the case of Abidjan, Côte D’Ivoire. Focuses on the motivations for the reforms, how the reforms
affected performance and why, and why the system performs well.
Competition, Franchising, Bidding, Negotiation, Natural Monopoly, Contract
Managing the Regulatory Process: Design, Concepts, Issues, and the Latin America and Caribbean Story
Washington, D.C.: The World Bank Group, 1999, Chapter 9.
Guasch, J. Luis, and Pablo Spiller
Examines concession arrangements. Considers issues of sole source and competitive procurement,
principal-agent problems within the government procurement process, types of procurements, and
collusion.
Designing Auctions for Concessions: Guessing the Right Value to Bid and the Winner’s Curse
Note no.160 in Public Policy for the Private Sector, Washington, D.C.: World Bank Group, 1998.
Klein, Michael
Examines reasons why regulators are involved in auctions, namely issues of technical expertise,
consistency between contact award and contract enforcement, knowledge of bidders, independence, and
information gathering, especially for future price reviews.
Sectoral ReferencesWATER
Key Words
Regulatory Oversight of Competitive ProcurementCore References
Sectoral ReferencesTELECOMMUNICATIONS
Competition for the Market
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On the Design and Implementation of the GSM Auction in Nigeria – the World’s First Ascending Clock
Spectrum Auction
Telecommunications Policy, 27(5-6): 2003, pp. 383-405.
Doyle, Chris, and Paul McShane
Describes the Nigerian GSM auction. Considers auction design, revisions to the design, and management
of the auction.
Competition, Franchising, Bidding, Negotiation, Natural Monopoly, Contract, Transparency
Infrastructure Concessions – To Auction or Not to Auction?
Note no. 159 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 1998.
Klein, Michael
Examines whether the authority letting a concession should negotiate a contract for an exclusive private
infrastructure deal or engage in an auction. Negotiations with a single supplier are faster than an auction,
but having even a quick auction improves the authority’s negotiating position.
Designing Auctions for Concessions: Guessing the Right Value to Bid and the Winner’s Curse
Note no.160 in Public Policy for the Private Sector, Washington, D.C.: World Bank Group, 1998.
Klein, Michael
“The private sector often uses some form of competitive negotiation, which in principle operates like an
open auction. But for government procurement or procurement by regulated monopolies it is generally
desirable to allow less discretion than is involved in competitive negotiation.” Examines the merits and
problems of open and sealed bids.
The Case-by-Case Approach to Privatization: Techniques and Examples – Privatization Toolkits
World Bank Technical Paper No. 403, Washington, D.C., 1998.
Welch, Dick, and Olivier Fremond
Provides steps in auctions and explains that negotiated sales are necessary when there is a single bidder
or when one bidder is clearly superior to all other bidders.
Concessions of busways to the private sector : the Sao Paulo Metropolitan Region experience
Produced by: Policy Research Working Papers, World Bank , 1995.
Rebelo, Jorge M., and Pedro P. Benvenuto
Demonstrates that private companies are ready to go deeper into public transport than they have gone
before. Reviews tender documents for ten bus corridors (one state and nine municipal), defining rules for
private concerns to bid for implementing and operating trunkline services.
Bidding, Negotiation
Regulatory Reforms in India: Effectiveness, Efficiency, and Impacts
The Energy and Resources Institute, New Delhi, India, 2003.
Garg, A., M. Kabra, and R. Kacker
The Nigerian Auction of the 2G Spectrum (A)
University of Florida, Department of Economics, PURC Case Study, 2007.
Nahlik, Andrew, and Mark A. Jamison
Key Words
Negotiated BidsCore References
Key Words
Case Studies
Competition for the Market
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Privatization of Electricity Distribution: The Orissa Experience
Tata Energy Research Institute, New Delhi, India, 2003. Purchase.
Ramanathan, K. and S. Hasan
Information
http://regulationbodyofknowledge.org/glossary/i/information/[17/01/13 9:56:17 PM]
Glossary -> I
Data that has been recorded, classified, organized, related or interpreted so that meaning is apparent.
Information
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Regulators
http://regulationbodyofknowledge.org/glossary/r/regulators/[17/01/13 9:57:00 PM]
Glossary -> R
A term used to refer to members of a government agency responsible for monitoring sector performance,
addressing stakeholder concerns, and implementing government policies. An individual regulator may serve as a
member of a commission that is responsible for balancing the interests of producers, consumers, and political
officials.
Regulators
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Cost
http://regulationbodyofknowledge.org/glossary/c/cost/[17/01/13 9:57:34 PM]
Glossary -> C
In accounting, an outlay for the purchase of a productive input or an allocation of an investment across time
periods (Depreciation). Other costs include Wages, Salaries, and Materials. In economics, the opportunity cost
is the highest valued alternative as the result of a choice. An opportunity cost sometimes involves some form of
payment, like a wage. However, the existence of an opportunity cost does not depend on of any actual cash
outlay.
Cost
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Demand
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Glossary -> D
In graphical terms, it shows how quantity demanded depends on price. More generally, it reflects consumer
preferences and ability to pay. Measured over a given time period, demand is determined by income, tastes,
and the price of complementary and substitute goods, among other factors.
Demand
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Monopoly
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Glossary -> M
Exclusive control of a market by a single provider, supplier or seller.
Monopoly
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Competition
http://regulationbodyofknowledge.org/glossary/c/Competition/[17/01/13 9:59:25 PM]
Glossary -> C
Competition tends to come in two varieties: competition among the few (a market with a small number of sellers
or buyers, such that each can exercise some degree of market power) and competition among the many
(Perfect competition–a market with so many buyers and sellers that none is able to influence the market price
or quantity exchanged).
Competition
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Auction
http://regulationbodyofknowledge.org/glossary/a/auction/[17/01/13 10:00:05 PM]
Glossary -> A
Any of a number of methods for determining sales price. Interested parties place bids and the highest bidder
obtains the item if the bid is greater than the reservation price (minimum acceptable bid). Alternatively, there
can be an auction for a subsidy to provide a service (say, to a high cost, un-served geographic area); in such
cases, the lowest bid wins the subsidy. There are a number of different types of auctions with a variety of
characteristics, including Dutch auctions and second price auctions (see Vickery auction).
Auction
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Bidding
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Glossary -> B
To make an offer of; to propose. Specifically: To offer to pay (a certain price, as for a thing put up at auction),
or to take (a certain price, as for work to be done under a contract).
Bidding
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Price Level Regulation
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Basic Forms of Regulation
Incentive Features and Other
Properties
Features of Price Cap and
Revenue Cap Regulation
Earnings Sharing
Issues In Regulating the Price
Level
Properties of Benchmarking
and Yardstick Analyses
Conducting A Price Review
Concluding Observations
Related FAQs
Annotated Reading List
Principles
Price Regulation
Revenue Caps
Principles of Using
Efficiency Measures for
Yardstick Regulation
Earnings and Revenue
Sharing Techniques
It is time to address incentive regulation, which is the third instrument that regulators use to control market
power and address the asymmetry between the government and the operator with respect to objectives and
information. In many instances this topic is intertwined with financial analysis, which is the subject of Financial
Analysis.
Incentives can be used in several contexts. For example, policymakers in the United States used a quid pro quo
incentive when some of the U.S. incumbent local telephone companies were allowed to enter long distance
markets only if they first cooperated in opening their local markets to competition. This chapter focuses on
incentives related to the regulation of the overall price level of the service provider. First, the basic forms of
regulation used to regulate price levels are addressed. Then the underlying principles of incentive regulation are
explained, and how each form of regulation addresses those principles is summarized. How each form of
regulation is implemented and the issues that regulators face is reviewed, followed by describing the regulatory
processes used to review overall price levels. Following this section’s narrative is a list of case studies and lists
of references. References are organized by topic.
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Quality, Social, Environmental Issues
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Quality of Service
Environmental and Safety
Issues
Social Aspects
Concluding Observations
Related FAQs
Annotated Reading List
Quality of Service
Environmental and Safety
Issues
Social Aspects
Regulators often focus on issues of price, incentives, and market structure.1 However, issues of service quality,
achieving social objectives, and the environment – sometimes collectively called non-price issues – also receive
considerable attention. As in the case of tariff design, there are instances in service quality, social, and
environmental issues in which the interests of the operator and the interests of the government may coincide.
An example is the case of prepaid cards for mobile service in telecommunications described in Tariff Design.
Telecommunications operators developed these cards without government direction and many among the poor
are now able to have phone service as a result of these cards.
Situations, however, where the interests of the government differ from the interests of the operator.2 For
example, if the customers at the margin – i.e., the customers who are most indifferent about whether or not to
purchase the service – are not very responsive relative to other customers to changes in service quality, then
the operator has an incentive to under invest in quality. Furthermore, it may be difficult for customers to
ascertain quality before making their consumption decision or to adjust their purchasing if quality is poor. In
these situations the pricing mechanism does not provide the operator with an incentive to invest in the
appropriate amount of quality.
Also, if the environmental impact of the utility service is an externality, then a profit-maximizing operator would
under invest in environmental protection. An externality is an effect that is visited on someone who is not a party
to the transaction. For example, if producing electricity causes air pollution, people who are not purchasing the
electricity may suffer from the air pollution. Absent government intervention or some other extra-market effort,
this pollution effect does not affect the operator’s profits, so the operator does not make production decisions
that are beneficial from a welfare perspective.
When the interests of the operator and the interests of the government do not coincide, the government may
find it optimal to establish incentives for the operator to pursue the government’s goals with respect to service
quality, social issues, and the environment. These issues are considered in this section, as are service quality
issues, environmental issues, and finally social issues. Following this section’s narrative is a list of references,
organized by topic.
1. Pricing, incentive regulation, and market structure are covered in Chapters Tariff Design, Price Level
Regulation, and Market Structure and Competition respectively.
2. See General Concepts for a discussion of the importance of asymmetries between the operator and the
government.
Quality, Social, Environmental IssuesIntroduction
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Information in the Regulatory Process
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Information in the Regulatory
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The first step in decreasing the information asymmetry between the government and the operator is to identify
the kinds of information that the regulator needs.1 The regulator’s responsibilities and instruments used for
regulation determine the regulator’s information needs, although they do not necessarily indicate what the
regulator can realistically expect to gather and use.2 As a result, it can be said that information availability
determines what regulatory instruments can actually be used. Sufficient and accurate information is important
because, without it, the information asymmetry between the regulator and the operator could lead to profit for
the operator above its cost of capital; to the regulator making poorly-informed decisions on issues of market
structure, service quality, and service availability; or to financial distress for the operator. In general, regulators
gather operator accounting and operating statistics on a regular basis.3 This information can be used to assess
the operator’s ability to operate efficiently,4 the financial condition of the operator,5 and market demand.6
Additional information is needed for price reviews, perhaps including detailed explanations of past management
decisions, adjustments that the operator has made to its historical records, and projections.7
1. See the reference section on Financial Analysis.
2. Regulatory Instruments in Foundations of Regulation provides an overview of regulatory instruments. The
remaining chapters provide details on regulatory instruments.
3. See Financial Analysis’ references on Basic Financial Statements and Regulatory Systems of Accounts.
4. See Price Regulation.
5. See Earnings Measurement.
6. See Demand Forecasting for more information about forecasting demand.
7. See Price Level Regulation for further information on conducting a price review.
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Regulation of Financial Statements
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Information in the Regulatory
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Annotated Reading List
You're in the section: Financial Analysis -> Regulation of Financial Statements
Regulators apply two systems of rules for controlling how an operator reports its financial results.1 The first
system of rules is called the Uniform System of Accounts (USOA), which outlines how operators are to keep
and report their financial records for regulatory purposes.2 Typical reports include balance sheets, income
statements, cash flow statements, and operating statistics. Having a USOA decreases opportunities for abuse
and helps in overcoming the operators’ information advantage over the regulator. The objectives of accounting
regulation are to provide accurate records for ratemaking, clearly identify assets and asset values (for
ratemaking, stranded cost calculations, and asset transfer at the end of a franchise), assess operator earnings,
separate utility from non-utility activities, benchmarking, monitoring performance on investment and other
license requirements, and transparency for investors. All financial statements should be expressed for the utility
operations of the operator, the operator’s non-utility operations, and the operator’s holding company, if there is
one.
The second system of rules that regulators apply to control how an operator reports financial information is
called accounting separation (sometimes called ring fencing) and is frequently applied when the operator has
lines of business that the regulator does not regulate.3 Market Structure and Competition provides examples of
situations in which regulators frequently require accounting separations. The regulator generally requires the
operator to provide financial statements for (1) the entire corporation, (2) country-specific operations, and (3) just
the regulated operations. Financial statements for the entire corporation cover all domestic and international,
regulated and non-regulated operations. Financial statements for country-specific operations cover all regulated
and non-regulated operations related to the regulator’s country. Financial statements for just regulated
operations cover all of the services under the regulator’s jurisdiction.
Regulatory requirements for accounting separations generally include rules for keeping separate regulated and
non-regulated accounts where feasible, allocating costs in accounts that the operator uses for both regulated
and non-regulated operations, transactions between corporate affiliates, and procedures for compliance
reporting. Costs for facilities and operations that are shared by regulated and non-regulated operations are
allocated between the regulated and non-regulated operations according to rules set forth by the regulator. In
some instances, the regulator uses pricing restrictions on regulated services or non-regulated services to control
cross-subsidization. Pure price caps on regulated services may control cross-subsidization and price floors on
competitive services may, too.
The ease or difficulty with which accounting separation can be performed varies with the sector. Regulators
perform or require audits and perform comparative analyses to police cost shifting. Numerous factors are
available for the cost allocations involved in accounting separations and the regulator generally must make
trade-offs between priorities of practicality, accuracy, and auditability when selecting cost allocation factors.
Because of these trade-offs, the cost allocations can lose accuracy and give management incentives to make
uneconomic investments. Also, accounting separation generally involves asset transfers between regulated and
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non-regulated operations and regulators set standards for how these transfers are to be valued and recorded.
Because of these difficulties with accounting separation, and the cost of implementing it, regulators will
sometimes not apply accounting separation if the operator’s non-regulated business is very small relative to the
regulated portion. In these situations, regulators will sometimes simply include the non-regulated costs and
revenues in with the regulated books. In some instances the regulator may rely on something close to pure
price cap regulation, which would not require accounting separation.
1. At least some regulators will have a single set of rules that cover both the USOA and accounting
separation. The authors note them here as separate sets of rules.
2. See Basic Financial Statements. Because standard accounting procedures may not give regulators all of
the information they need to carry out their responsibilities, countries often give regulators authority to
determine financial reporting requirements.
3. See Regulatory Systems of Accounts. Effects of Competition in Tariff Design describes other effects of
competition in pricing.
Footnotes
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Information in the Regulatory
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You're in the section: Financial Analysis -> Comparative Analyses
There are at least two situations where the regulator may want to gather information from other jurisdictions,
such as other counties. Agencies that regulate operators that serve multiple jurisdictions may find it beneficial to
develop uniform reporting requirements and to share data.1 Also, information from other jurisdictions may be
useful for benchmarking analyses.2 The European Union, for example, used cross-country analyses to assist
National Regulatory Authorities in establishing interconnection prices in telecommunications. UK
regulators regularly benchmark their utilities against utilities in other counties. Regulators generally find such
international comparisons useful, but care must be taken to ensure that the operating conditions in the
comparator jurisdictions are sufficiently similar to those in the regulator’s own jurisdiction to make the
comparisons valid. Agencies that regulate operators that serve multiple jurisdictions may find it beneficial to
develop uniform reporting requirements and to share data.3 Data may be crosschecked across jurisdictions and
regulators can share resources for audits.4 Regulators can also use error-checking routines in spreadsheets,
especially if operators submit data electronically. Regulators should require that data be submitted in a
sufficiently disaggregated form to allow analysis.
1. See Regulatory Systems of Accounts for information on accounting requirements.
2. See Principles of Using Efficiency Measures for Yardstick Regulation in Price Level Regulation for further
information.
3. See Basic Financial Statements.
4. See Regulatory Process for other information on working with stakeholders and other government
agencies.
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Once the regulator has accounting records in hand that comply with the USOA and accounting separation
requirements, and if the regulator is using U.K.-style price cap regulation or some form of rate of return
regulation, the regulator then determines who – customers or shareholders – will pay these costs and under
what conditions. There are two components of this analysis. The first component is earnings assessment, which
identifies the received rate of return on the regulated operations. The second component is the measurement of
the cost of capital. Some forms of regulation, such as pure price cap regulation,1 do not rely on operator
accounting information for establishing overall price levels, so earnings assessments and estimates of the cost
of capital are unnecessary in these situations.
Determining the earnings of the operator’s regulated operations involves asset valuation, assessing the
prudency and usefulness of the operator’s expenditures, setting depreciation rates, and determining the
treatment of unpaid bills, customer or government-provided capital, and imputed revenue.2 With respect to
valuing assets for regulated services (called the rate base or regulated assets), there are two basic approaches:
the cost-based approach and the value-based approach. The cost-based approach, also called original cost or
historical cost accounting, values assets at what the operator originally paid for the assets. There are two value-
based approaches. The first of these – the fair value approach – values the assets based on the profits they
can generate for shareholders. This can create circularity when asset value also enters into the formula for
determining profits. The second value-based approach is called current cost or replacement cost accounting,
which values assets each year at what it would cost to acquire them that year.3 The original cost approach is
commonly used for assessing returns to shareholders. The current cost approach is most commonly used for
determining economic costs for rate design.
When setting the overall price level for regulated services, the regulator generally allows capital and operating
expenses that are prudently incurred – i.e., that are cost minimizing given the level of output and service quality
required by the market and by regulation – and used and useful to be covered by regulated prices. Used and
useful means that the inputs purchased are used for and needed for providing the regulated service.
The regulator also often requires that costs be known and measurable, which means that the operator must
justify with documentation, facts, and accepted methodologies that the costs it reports to the regulator are its
actual costs. Acceptable evidence that costs are known and measurable would include detailed demonstration
that the costs are needed to perform the operator’s duties and obligations under its license or
franchise agreement, audits that assure that the accounting information accurately reflects the service provider’s
actual operations, and paper trails that verify that the accounting records can be traced to original invoices and
payments. If costs are forecasted, then the regulator would be expected to approve the
forecasting methodologies and inputs.
The regulator often allows amounts of unpaid bills to be reflected in prices if the amounts represent normal
business experience. The justification for this is that the operator generally cannot expect all customers to
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always pay their bills, so the lost revenue must be recovered elsewhere if the operator is to remain financially
whole. The regulator often disallows the recovery of excessive unpaid bills if the regulator believes the
operator is not exerting sufficient effort to collect unpaid bills.
The regulator may also impute revenue to the operator’s regulated accounting books if the regulator believes
that the operator failed to record on the regulated accounting books all of the revenue that should be attributed
to regulated operations. An example might be a secondary business, such as directory advertising, that is
profitable because the operator is a telecommunications provider.
Generally long-lived assets are capitalized and the regulator, when regulating the overall price level, allows
investors the opportunity for return of the investment through depreciation and a return on the
investment through the allowed rate of return. An exception is capital provided by customers or by the
government, if it takes the form of an interest-free loan. An example of customer-provided capital would be a
customer’s contribution to pay for extension of the network to the customer’s location. The regulator may
consider customer-provided capital to be an interest-free loan to the operator, in which case the operator
receives no return on that portion of its regulated assets, or the regulator may impute to the operator an interest
payment on the customer-provided capital, the effect of which is to lower the operator’s regulated prices.
Interest-free government-provided capital, such as a universal access subsidy, may be treated as interest-free
capital.
The regulator generally allows the operator to recover corporate income or profit taxes that are related to
regulated services, from customers of regulated services. However, differences between regulatory
depreciation and tax depreciation cause a mismatch in cash flows. Regulators can address this by creating a
special reserve account that “holds” the taxes that customers pay through prices until the operator actually pays
the taxes. This reserve is customer-provided capital until the operator uses it, so it is deducted from the rate
base.
Under rate of return regulation and some forms of price cap regulation, the rate base is the original cost minus
accumulated depreciation. Only assets that are prudently obtained and that are used and useful for utility
services are included in the rate base. If the assets are forecast, the treatment of differences between forecast
and actual investment at the next price review are important. Over forecasts (or under investment) could be the
result of the operator returning excess cash flow to investors or from improved efficiency. If the regulator
believes forecast investment exceeded actual investment and that this resulted from a forecasting error or under
investment, the regulator may use claw back, which returns the excess in amount to customers. Claw back
gives the operator an incentive to over invest if forecasted investment exceeds actual investment needs.
Regulators generally incorporate income or profit taxes in the cost of capital. However, differences between
regulatory deprecation and tax deprecation cause a mismatch in cash flows. Regulators can address this by
creating a special reserve account that “holds” the taxes that customers pay through prices until the operator
actually pays the taxes. This reserve is customer provided capital until the operator uses it, so it is deducted
from the rate base. Other taxes, unless specifically passed through to customers on their bills, are part of the
operator’s cash flow and are generally considered as such during a price review.
1. Pure price cap regulation is almost never practiced.
2. See Ring Fencing and Control of Cross-Subsidization.
3. Identifying Informational Requirements also considers valuing assets in situations with high inflation.
Footnotes
Earnings Measurement
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Cost of Capital
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Information in the Regulatory
Process
Regulation of Financial
Statements
Comparative Analyses
Earnings Measurement
Cost of Capital
Business Decision Making and
Its Financial Effects
Information Management
Concluding Observations
Related FAQs
Annotated Reading List
You're in the section: Financial Analysis -> Cost of Capital
To assess whether the rate of return the operator is able to receive is sufficient to attract investor capital, the
regulator must determine operator’s cost of capital.1 Generally the cost of capital is estimated as the weighted
average cost of capital (WACC), which is a weighted average of the operator’s cost of debt and cost of equity.
Unless the regulator believes that the operator has an inefficient capital structure, the weighting for
debt (respectively, equity) is the amount of the operator’s debt (respectively, equity) divided by the operator’s
total invested regulatory capital. Capital structure refers to the proportions of debt and equity that the operator
uses to finance her operations.
The calculation of WACC requires market data. If these data are unavailable, close comparators may be used.
The capital asset pricing model (CAPM) is the most common model for estimating the cost of equity. Cost of
equity is adjusted to reflect the operator’s income tax rate. An adjustment for foreign currency risk may be
needed if the operator obtains investment that is denominated in a foreign currency.
1. See Earnings Measurement.
Cost of Capital
Footnotes
Sections
Foundationsof Regulation
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FinancialAnalysis
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Tariff Design Quality,Social,EnvironmentalIssues
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Information in the Regulatory
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Regulation of Financial
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Comparative Analyses
Earnings Measurement
Cost of Capital
Business Decision Making and
Its Financial Effects
Information Management
Concluding Observations
Related FAQs
Annotated Reading List
You're in the section: Financial Analysis -> Business Decision Making and Its Financial Effects
When an operator considers two or more courses of action, he generally bases his choice on the cash flows
that the different options offer.1 These cash flows occur over time and cash flow that is farther into the future is
less important than cash flow that is nearer to the present. To quantify these relative differences, operators
discount future cash flows to present values by dividing each year t’s cash flow by (1 + r)t, where r is the
discount rate.2 r represents both the time value of money and the project risk. In other words, r represents what
the operator needs to pay both debt holders and shareholders to obtain capital for this project. In general, the
greater the risk in a project, the higher will be the discount factor that the operator would apply to the projected
cash flows. The net of the present value of the cash inflow and the present value of the cash outflow is called
the NPV of the project. Unless there is a barrier to raising capital3 or to obtaining some necessary input, an
operator generally is willing to implement any project that has a positive NPV.4 Once a project is chosen and
implementation begins, the project has financial effects on the operator and the operator records these effects
in its financial statements.5 There are three basic financial statements that are of interest in regulation. The first
is the cash flow statement, which records all of the cash inflows and outflows that result from the normal
operations and projects that the operator undertakes. Cash flows are of interest to regulators in part because
some regulators use projected cash flows to establish X-factors for price cap regulation.6 that relies on
projected cash flows to establish X-factors is called U.K.-style price cap regulation.7 Revenue and operating
expenses related to projects and normal operations are recorded on the income statement, along with interest,
taxes, and depreciation expenses. Operating expenses are costs incurred for inputs that are used up within a
year’s time. Assets (plant, other property and investments, current assets, and deferred debts) and liabilities
(stock, long-term debt, non-current liabilities, current and accrued liabilities, and deferred credits) are recorded
on the balance sheet. The income statement and balance sheet are of particular interest in rate of return
regulation, but are important for other forms of regulation as well. This is described further in Price Level
Regulation.
1. See Financial Analysis in the reference section.
2. Where NPV0 is Net Present Value today for cash flows received in 1 year, 2 years, etc
3. Usually there are barriers to raising capital in a developing country.
4. Some regulators also use NPV analysis in regulating overall price levels. Price Regulation in Price Level
Regulation notes these financial analysis techniques.
5. See Identifying Informational Requirements.
Business Decision Making and Its Financial Effects
Footnotes
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
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6. For convenience, the authors refer only to price cap regulation, but these statements also apply to
revenue cap regulation, which is described in the chapter on incentive regulation.
7. See Price Regulation in Price Level Regulation for information on price cap regulation and the financial
modeling that U.K.-style price cap regulation entails.
Information Management
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Information in the Regulatory
Process
Regulation of Financial
Statements
Comparative Analyses
Earnings Measurement
Cost of Capital
Business Decision Making and
Its Financial Effects
Information Management
Concluding Observations
Related FAQs
Annotated Reading List
You're in the section: Financial Analysis -> Information Management
Once the information needs have been defined, the regulator needs to establish how the information will be
gathered and managed.1 Most regulators require operators to submit accounting and operating statistics
annually, although some collect certain data, such as fuel costs, on a quarterly basis if there is a need to adjust
prices, analyze seasonality of the data, or closely monitor patterns. In developing their systems for managing
information, regulatory agencies often seek to provide citizens and operators with greater access to
information about the agency and the operators, promote transparency in the regulatory process, provide
public interaction with the agency, protect information on customers and operators that should be kept private,
ensure relevant information can be retained and retrieved accurately and efficiently, and provide cost effective
means for operators to provide the agency with information.2 Best practices are emerging on using the web and
email for accomplishing these goals. Key issues are how to protect information on customers and operators that
should be kept private and how to provide information in a way that is cost effective for both the agency and the
stakeholders.
1. See Identifying Informational Requirements. See Institutional Design Issues in Regulatory Process for
information on other agency management issues.
2. See Regulatory System of Accounts. See Regulatory Process for information on communicating with the
public and other stakeholders.
prices
Information Management
Footnotes
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
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Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
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Concluding Observations
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Information in the Regulatory
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Regulation of Financial
Statements
Comparative Analyses
Earnings Measurement
Cost of Capital
Business Decision Making and
Its Financial Effects
Information Management
Concluding Observations
Related FAQs
Annotated Reading List
You're in the section: Financial Analysis -> Concluding Observations
Although regulators gather and study financial data to at least partially overcome the information asymmetry
between the operator and the regulator, the financial information provided by the operator reflects the extent to
which the operator is willing to show the regulator how efficiently it can operate. The operator’s innate ability to
be efficient and the amount of effort the operator exerts to be efficient are called private or hidden information
because the regulator cannot directly observe it. The regulator often tries to peer into this hidden information by
collecting financial information, conducting prudency reviews, and performing management audits, but these
approaches involve second-guessing the operator and require the regulator to become somewhat of an expert
on managing an operator.
Two dangers exist when the regulator relies only on his ability to overcome information asymmetries through
information gathering. The first danger is that the regulator will never have the resources to fully understand the
service provider’s operations, with the result that the service provider is inefficient. The second danger is that
the regulator over-steps her knowledge and does not allow the operator to recover from customers the
costs that truly are prudent and used and useful. This situation encourages the operator to become inefficient by
being overly cautious in its business decisions and to limit cash outflow in an effort to provide investors with a
positive NPV.
To overcome these two dangers, the regulator generally adopts some form of incentive regulation, which
rewards the operator with the opportunity to keep extra profits if the operator reveals its ability to operate
efficiently, exerts the optimal amount of effort to be efficient, or both. This is not to imply that incentive regulation
is a substitute for gathering information and learning about the operator. Indeed incentive regulation works best
when the regulator has engaged in extensive data gathering and analysis. Price Level Regulation examines
these incentive techniques.
Concluding Observations Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
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Information in the Regulatory
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Regulation of Financial
Statements
Comparative Analyses
Earnings Measurement
Cost of Capital
Business Decision Making and
Its Financial Effects
Information Management
Concluding Observations
Related FAQs
Annotated Reading List
Funding investments: In what ways does privatization help meet the challenges of funding network
expansion? To what extent does public ownership help meet the challenges of funding network expansion?
ROI: What is the appropriate Return on Investment for a SOE?
Related FAQs Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Annotated Reading List
http://regulationbodyofknowledge.org/financial-analysis/references/[17/01/13 10:07:33 PM]
Financial Analysis
Identifying Informational
Requirements
Basic Financial Statements
Regulatory Systems of
Accounts
Ring Fencing and Control of
Cross-Subsidization
Earnings Measurement
Determination of Cost of
Capital (Debt and Equity),
Including With Scarce or
Unreliable Cost Information
Financing and Risk Mitigation
Data Sources
Systems for Obtaining and
Managing Information
Measures to Improve Data
Quality
Systems for Reporting
Information and Public Access
to Information
NPV Concepts – Project Analysis and Risk Adjustments Core References Restructuring and Managing the
Enterprise in Transition Washington, D.C.: The World Bank, 1998, Chapters 1 and 9. Crum, Roy L. [ Read more
... ]
Core References Infrastructure Concessions, Information Flows, and Regulatory Risk Note no. 203 in Public
Policy for the Private Sector. Washington, D.C.: World Bank Group, December 1999. Burns, P.. [ Read more ... ]
[NOTE: Any basic accounting text should provide adequate information on the meaning and use of balance
sheets, income statements, and cash flow statements.] Core References Restructuring and Managin. [ Read
more ... ]
Core References The role of regulatory accounts in regulated industries: A final proposals paper by Chief
Executive of Ofgem; Director General of telecommunications; Director General of water servic. [ Read more ... ]
Core References Ring Fencing Mechanisms for Insulating a Utility in a Holding Company System Washington,
D.C.: National Association of Regulatory Utility Commissioners, 2003. Devlin, Timothy, Rebec. [ Read more ... ]
Asset Valuation Techniques Core References Restructuring and Managing the Enterprise in Transition
Washington, D.C.: The World Bank, 1998, Chapters 2-3. Crum, Roy L., and Itzhak Goldberg Focuses . [ Read
more ... ]
Estimating the cost of capital with limited or unreliable information Cost of Deb Cost of Equity Role of Taxes
Weighted Average Cost of Capital, including the choice of weightings Foreign. [ Read more ... ]
Core References Financing Water Supply and Sanitation Investments: Utilizing Risk Mitigation Instruments to
Bridge the Financing Gap World Bank: Water Supply and Sanitation Sector Board Discussion P. [ Read more ...
]
Core References IBNET Water and Sanitation Services Database http://www.ib-net.org. The International
Benchmarking Network for Water and Sanitation Utilities (IBNET) provides the world’s largest . [ Read more ... ]
Annotated Reading List for Financial AnalysisFinancial Analysis
Identifying Informational Requirements
Basic Financial Statements
Regulatory Systems of Accounts
Ring Fencing and Control of Cross-Subsidization
Earnings Measurement
Determination of Cost of Capital (Debt and Equity), Including With Scarce or UnreliableCost Information
Financing and Risk Mitigation
Data Sources
Systems for Obtaining and Managing Information
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Annotated Reading List
http://regulationbodyofknowledge.org/financial-analysis/references/[17/01/13 10:07:33 PM]
Core References Energy Regulatory Commission Web Sites Don’t Click (2000) Energy E-Comm.com. Energy
E-Comm.com Describes best practices for web use by regulatory agencies, including providing up. [ Read more
... ]
Core References Measuring the Impact of Energy Reform – Practical Options Note no. 210 in Public Policy for
the Private Sector. Washington, D.C.: World Bank Group, May 2000. Foster, Vivien Descr. [ Read more ... ]
Core References The E-government Handbook for Developing Countries Washington, D.C.: World Bank, 2002,
pp. 1-20. World Bank States that developing countries can use e-government practices to provi. [ Read more ...
]
Measures to Improve Data Quality
Systems for Reporting Information and Public Access to Information
Financial Analysis
http://regulationbodyofknowledge.org/financial-analysis/references/financial-analysis/[17/01/13 10:08:06 PM]
Financial Analysis
Identifying Informational
Requirements
Basic Financial Statements
Regulatory Systems of
Accounts
Ring Fencing and Control of
Cross-Subsidization
Earnings Measurement
Determination of Cost of
Capital (Debt and Equity),
Including With Scarce or
Unreliable Cost Information
Financing and Risk Mitigation
Data Sources
Systems for Obtaining and
Managing Information
Measures to Improve Data
Quality
Systems for Reporting
Information and Public Access
to Information
You're in the section: Financial Analysis -> Annotated Reading List -> Financial Analysis
Restructuring and Managing the Enterprise in Transition
Washington, D.C.: The World Bank, 1998, Chapters 1 and 9.
Crum, Roy L., and Itzhak Goldberg
Focuses on transitioning economies. Explains time value of money and calculating rate of return, including
adjusting for inflation, risk, and multiple periods (present value calculations. Defines risk. Examines project
analysis, including sensitivity and scenario analysis, internal rate of return, discount rates, and risk.
Resetting Price Controls for Privatized Utilities: A Manual for Regulators
Washington, D.C.: World Bank, 1999, Chapter 5.
Green, Richard, and Martin Rodriguez Pardina
Describes net present value analysis in a regulatory context for conducting a price review.
Managerial Economics
London: Norton & Co., 2002, Appendix A.
Mansfield, Edwin, W. Bruce Allen, Neil A. Doherty, and Keith Weigelt
Considers issues of time value of money, calculating rate of return, and risk.
Cash flow, Risk, Rate of return, Present Value, Net Present Value, Inflation
Accounting for Infrastructure Regulation: An Introduction
Washington, D.C.: The World Bank, 2008, Annex 1.
Rodriguez Pardina, Martin, Richard Schlirf Rapti, and Eric Groom
Reviews ratios to analyze liquidity, activity, capital structure, and profitability.
Ratio Analysis, Liquidity, Capital Structure, Profit
Financial Analysis
NPV Concepts – Project Analysis and Risk AdjustmentsCore References
Key Words
Ratio Analysis
Key Words
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Financial Analysis
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Identifying Informational Requirements
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Financial Analysis
Identifying Informational
Requirements
Basic Financial Statements
Regulatory Systems of
Accounts
Ring Fencing and Control of
Cross-Subsidization
Earnings Measurement
Determination of Cost of
Capital (Debt and Equity),
Including With Scarce or
Unreliable Cost Information
Financing and Risk Mitigation
Data Sources
Systems for Obtaining and
Managing Information
Measures to Improve Data
Quality
Systems for Reporting
Information and Public Access
to Information
You're in the section: Financial Analysis -> Annotated Reading List -> Identifying Informational
Requirements
Infrastructure Concessions, Information Flows, and Regulatory Risk
Note no. 203 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, December 1999.
Burns, P., and A. Estache
Explains that because the asymmetry of information places the regulator at a disadvantage, the regulator
must define its information requirements and data processes early in the design of the concession contract
and transaction. It should take advantage of the government’s leverage during bidding to extract
information from concessionaires and commitments from them to provide continued flows of information to
aid price review. Information provision is a two-way street. Details types of information to gather.
Resetting Price Controls for Privatized Utilities: A Manual for Regulators
Washington, D.C.: World Bank, 1999, Chapter 3.
Green, Richard, and Martin Rodriguez Pardina
Holds that the regulator should gather general accounting information, including past information, on an
ongoing basis. For a price review, the operator should provide a business plan and projections of demand,
operating costs, and investments.
Regulatory Requirements Under Different Forms of Utility Service Delivery
Macroconsulting, 2007.
Rodriguez Pardina, Martin, and Richard Schlirf Rapti
Examines different forms of utility management and the regulatory information requirements under each.
Includes case studies of Mali (electricity production and distribution, concession), Senegal (water production
and distribution; affermage), Niger (water production and distribution; affermage), Argentina (electricity
distribution; concession) and Peru (water production and distribution; concession).
National Regulatory Reporting for Electricity Distribution and Retailing Businesses
Australian Competition and Consumer Commission, Sidney, 2002.
Utility Regulators Forum
Explains that if operators serving multiple jurisdictions are generally subject to multiple reporting
requirements, these operators incur higher reporting costs than if there was a single, uniform reporting
requirement. Discusses other problems. Establishes uniform reporting requirements for electricity
distribution providers in Australia.
Decision: Statement of principles for the regulation of transmission revenues: Information requirements
Identifying Informational Requirements
Core References
Sectoral ReferencesELECTRICITY
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Identifying Informational Requirements
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guidelines
5 June 2002.
Australian Competition and Consumer Commission
Details information filing requirements for electricity transmission operators. Describes information needs for
revenue caps. Describes policies for information disclosure and future information policy issues.
Measuring the Impact of Energy Reform – Practical Options
Note no. 210 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, May 2000.
Foster, Vivien
Identifies indicators needed for assessing the impact of energy reform on the poor.
Scoping Study into Data Collection Issues for Incentive Regulation, Report prepared for Australian
Competition and Consumer Commission
19 November 2003.
Meyrick and Associates
Identifies data needs for incentive regulation.
The Economics of Regulation: Principles and Institutions
Cambridge, MA: MIT Press, 1988, Reissue Edition, vol. I, Chapter 7.
Kahn, Alfred
Summarizes some types of cost and demand information that regulators may need.
Information, Assets, Costs, Investment
Decision: Statement of principles for the regulation of transmission revenues: Information requirements
guidelines
5 June 2002.
Australian Competition and Consumer Commission
Draft Energy and Water License Compliance Policy
Independent Pricing and Regulatory Tribunal of New South Wales, September 2003.
Independent Pricing and Regulatory Triburnal of New South Wales
Scoping Study into Data Collection Issues for Incentive Regulation, Report prepared for Australian
Competition and Consumer Commission
19 November 2003.
Meyrick and Associates
Chart of Accounts and Cost Allocation Manual: Detailed Requirements for Fixed-Line Telephone
Operators
September 19, 1999.
South African Telecommunications Regulatory Authority
Other References
Key Words
Case Studies
Basic Financial Statements
http://regulationbodyofknowledge.org/financial-analysis/references/basic-financial-statements/[17/01/13 10:09:10 PM]
Financial Analysis
Identifying Informational
Requirements
Basic Financial Statements
Regulatory Systems of
Accounts
Ring Fencing and Control of
Cross-Subsidization
Earnings Measurement
Determination of Cost of
Capital (Debt and Equity),
Including With Scarce or
Unreliable Cost Information
Financing and Risk Mitigation
Data Sources
Systems for Obtaining and
Managing Information
Measures to Improve Data
Quality
Systems for Reporting
Information and Public Access
to Information
You're in the section: Financial Analysis -> Annotated Reading List -> Basic Financial Statements
[NOTE: Any basic accounting text should provide adequate information on the meaning and use of balance
sheets, income statements, and cash flow statements.]
Restructuring and Managing the Enterprise in Transition
Washington, D.C.: The World Bank, 1998, Chapters 2-3.
Crum, Roy L., and Itzhak Goldberg
Focuses on transitioning economies. Describes balance sheet and its elements (assets, debt, and equity),
income statement and its elements, measurements of earnings, depreciation, cash flow statements, accrual
versus cash accounting, generally accepted accounting principles, impact of inflation, restating financial
statements, and basic financial analysis of an enterprise.
Accounting for Infrastructure Regulation: An Introduction
Washington, D.C.: The World Bank, 2008, Chapters 3 and 5.
Rodriguez Pardina, Martin, Richard Schlirf Rapti, and Eric Groom
Explains why regulators need accounting information and describes basic financial statements.
Accounting, Costs, Assets, Expenses, Information, Balance sheet, Income statement, Earnings, Depreciation,
Cash flow, Accrual accounting, Inflation
Basic Financial Statements
Core References
Key Words
Sections
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RegulatoryProcess
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Regulatory Systems of Accounts
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Financial Analysis
Identifying Informational
Requirements
Basic Financial Statements
Regulatory Systems of
Accounts
Ring Fencing and Control of
Cross-Subsidization
Earnings Measurement
Determination of Cost of
Capital (Debt and Equity),
Including With Scarce or
Unreliable Cost Information
Financing and Risk Mitigation
Data Sources
Systems for Obtaining and
Managing Information
Measures to Improve Data
Quality
Systems for Reporting
Information and Public Access
to Information
You're in the section: Financial Analysis -> Annotated Reading List -> Regulatory Systems of Accounts
The role of regulatory accounts in regulated industries: A final proposals paper
by Chief Executive of Ofgem; Director General of telecommunications; Director General of water services;
Director General of electricity and gas supply (Northern Ireland); U.K. Rail Regulator; U.K. Civil Aviation
Authority; and U.K. Postal Services Commission. April 2001.
Describes a set of common regulatory accounting principles for regulators in the U.K. Principles applied
include: (1) “regulatory accounts will be prepared and audited using the common regulatory accounting
framework;” (2) consistency in formatting where practicable; (3) clarity in audit requirements; and (4)
deadlines for publishing regulatory accounts.
Rate Case and Audit Manual
Washington, D.C.: National Association of Regulatory Utility Commissioners, 2003.
NARUC Staff Subcommittee on Accounting and Finance
Describes auditing purposes and procedures. Includes studying the operator’s accounting system,
analyzing historical data, focusing the audit, reviewing past decisions of the regulatory agency, reviewing
working papers, using external and internal audit reports, contacting other jurisdictions, managing the audit
process, confidentiality procedures, and identifying records to be reviewed.
Accounting for Infrastructure Regulation: An Introduction
Washington, D.C.: The World Bank, 2008, Chapters 5 and 7.
Rodriguez Pardina, Martin, Richard Schlirf Rapti, and Eric Groom
Explains why regulators need accounting information and describes approaches for establishing regulatory
accounting guidelines.
Decision: Statement of principles for the regulation of transmission revenues: Information requirements
guidelines
5 June 2002.
Australian Competition and Consumer Commission
Details information filing requirements for electricity transmission operators. Describes information needs of
the regulatory instruments used by the regulator. Describes policies for information disclosure and future
information policy issues.
Regulatory Accounting Guidelines: Report to Ofgem
March 2001.
Deloitte & Touche
Regulatory Systems of Accounts
Core References
Sectoral ReferencesELECTRICITY AND GAS
Sections
Foundationsof Regulation
MarketStructure andCompetition
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Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Regulatory Systems of Accounts
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Provides an assessment of Ofgem’s accounting guidelines at the time. Focuses on overhead allocations,
transfer pricing (internal recharges), and capitalization policies. Also considers historical cost accounting,
use of generally accepted accounting principles, need for regulatory accounts, asset valuation,
reconciliation, and activity accounting.
Regulatory Accounts: Final Proposals
November 2000.
Ofgem
Describes Ofgem’s accounting requirements. Explains reasons and responsibilities for regulatory accounts.
Describes regulatory accounts, monitoring procedures, enforcement procedures, and auditing policies.
Chart of Accounts and Cost Allocation Manual: Detailed Requirements for Fixed-Line Telephone
Operators
September 19, 1999.
South African Telecommunications Regulatory Authority
Explains that the regulator imposes accounting rules to obtain information to evaluate regulated prices and
to monitor compliance with public policy objectives. In the case of South Africa, the rules are designed with
the intent of using the “lightest” regulatory approach consistent with the regulator’s responsibilities. The
accounting manual describes the structure of the Chart of Accounts, “the contents of each account, the
segments for which revenue and cost information is required, the wholesale services for which fixed
landlines Operators are to provide cost visibility, the methodologies used for cost allocation and the
requirement for reporting financial details and results.”
Regulation and Deregulation of the Motor Carrier Industry
Ames, Iowa: Iowa State University Press, 1989.
Felton, John Richard and Dale G. Anderson
Explains how firms regulated by means of the operating ratio have a clear incentive to inflate the
numerators of their operating ratios to justify a rate increase.
RAG 1: Guideline for Accounting for Current Costs and Regulatory Capital Values: (Regulatory
Accounting Guideline version 1.03)
May 1992 (Revised January 2003).
OFWAT
Ofwat’s accounting guidelines regarding current costs and regulatory capital values. Considers
infrastructure, operational assets, and other tangible assets; third party contributions, reserves, adjustments
to historical cost operating profit, financing adjustments, exceptional and extraordinary items, content of
accounts, and regulatory capital value.
RAG 2: Guideline for Classification of Expenditure: (Regulatory Accounting Guideline version 2.03)
November 1996 (Revised January 2003).
OFWAT
Ofwat’s accounting guidelines for classifying expenditures. Considers asset and expense categories and
allocations.
RAG 3: Guideline for the Contents of Regulatory Accounting: (Regulatory Accounting Guideline version
3.05)
May 1992 (Revised January 2003).
OFWAT
Ofwat’s rules for content of regulatory accounts. Defines historical and current cost accounting for balance
sheets, income statements, and cash flow statements (current cost only). Provides guidelines for
TELECOMMUNICATIONS
TRANSPORTATION
WATER
Regulatory Systems of Accounts
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accounting statements, profit analysis, transactions with affiliated businesses, and other items.
RAG 4: Guideline for the Analysis of Operating Costs and Assets: (Regulatory Accounting Guideline
version 4.02)
May 1992 (Revised January 2003).
OFWAT
Ofwat’s rules for analysis of operating costs and assets. Considers analyses of individual activities (for
example, water supply), direct costs, general support costs, capital costs, service costs, tangible fixed
assets, and allocations and apportionments.
RAG 5: Transfer Pricing in the Water Industry: (Regulatory Accounting Guideline version 5.03)
April 1997 (Revised March 2000).
OFWAT
Ofwat’s accounting guidelines for transfer pricing. Describes basic principles, principles for transfers and
market testing, cost allocations, and reporting requirements.
Regulatory Accounts: Final Proposals
November 2000.
Ofgem
RAG 1: Guideline for Accounting for Current Costs and Regulatory Capital Values: (Regulatory
Accounting Guideline version 1.03)
May 1992 (Revised January 2003).
OFWAT
RAG 2: Guideline for Classification of Expenditure: (Regulatory Accounting Guideline version 2.03)
November 1996 (Revised January 2003).
OFWAT
RAG 3: Guideline for the Contents of Regulatory Accounting: (Regulatory Accounting Guideline version
3.05)
May 1992 (Revised January 2003).
OFWAT
RAG 4: Guideline for the Analysis of Operating Costs and Assets: (Regulatory Accounting Guideline
version 4.02)
May 1992 (Revised January 2003).
OFWAT
RAG 5: Transfer Pricing in the Water Industry: (Regulatory Accounting Guideline version 5.03)
April 1997 (Revised March 2000).
OFWAT
Chart of Accounts and Cost Allocation Manual: Detailed Requirements for Fixed-Line Telephone
Operators
September 19, 1999.
South African Telecommunications Regulatory Authority
Case Studies
Regulatory Systems of Accounts
http://regulationbodyofknowledge.org/financial-analysis/references/regulatory-systems-of-accounts/[17/01/13 10:09:44 PM]
Ring Fencing and Control of Cross-Subsidization
http://regulationbodyofknowledge.org/financial-analysis/references/ring-fencing-and-control-of-cross-subsidization/[17/01/13 10:10:17 PM]
Financial Analysis
Identifying Informational
Requirements
Basic Financial Statements
Regulatory Systems of
Accounts
Ring Fencing and Control of
Cross-Subsidization
Earnings Measurement
Determination of Cost of
Capital (Debt and Equity),
Including With Scarce or
Unreliable Cost Information
Financing and Risk Mitigation
Data Sources
Systems for Obtaining and
Managing Information
Measures to Improve Data
Quality
Systems for Reporting
Information and Public Access
to Information
You're in the section: Financial Analysis -> Annotated Reading List -> Ring Fencing and Control of
Cross-Subsidization
Ring Fencing Mechanisms for Insulating a Utility in a Holding Company System
Washington, D.C.: National Association of Regulatory Utility Commissioners, 2003.
Devlin, Timothy, Rebecca Phillips, and Thomas Ferris
Describes U.S. regulators’ practices for ring fencing.
The Economics of Regulation: Principles and Institutions
Cambridge, MA: MIT Press, 1988, Reissue Edition, vol. I, Chapter 6.
Kahn, Alfred
Examines issues of pricing in the presence of competition. Discusses issues of cross subsidy and price
flexibility.
Decision: Statement of Principles for the Regulation of Transmission Revenues: Transmission Ring-
Fending Guidelines: Reporting Guidelines
23 October 2002.
Australian Competition and Consumer Commission
Describes accounting separations requirements for transmission provider in Australia. Includes accounting
requirements, compliance, and reporting requirements.
Ring-Fencing in the Electricity and Gas Industries – Issues Paper
July 2000.
Office of the Regulator-General, Victoria
Examines ring-fencing policies in electricity and gas. Considers objectives, cross subsidization, preferential
access to essential facilities, joint marketing, access to information, structural separations options, ring-
fencing options, and criteria for evaluating options.
Ring Fencing Compliance Report Pro Forma
23 October 2002.
Australian Competition and Consumer Commission
Form operators must complete showing compliance with the regulator’s ring fencing requirements. Includes
compliance statement, separation of accounts, allocation of shared costs, treatment of confidential
information, and management of marketing staff.
Ring Fencing and Control of Cross-Subsidization
Core References
Sectoral ReferencesELECTRICITY
GAS
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Ring Fencing and Control of Cross-Subsidization
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Ring-Fencing in the Electricity and Gas Industries – Issues Paper
July 2000.
Office of the Regulator-General, Victoria
Examines ring-fencing policies in electricity and gas. Considers objectives, cross subsidization, preferential
access to essential facilities, joint marketing, access to information, structural separations options, ring-
fencing options, and criteria for evaluating options.
Record Keeping Rules on Initial Reports Relating to Accounting Separation
June 2003.
Australian Competition and Consumer Commission
Sets out recording keeping and reports for accounting separations for dominant telecommunications
provider.
Imputation testing (Initial Reports) Record Keeping and Reporting Rules, August 2003; Explanatory
Statement: Imputation Testing Record Keeping Rule
September 2003.
Australian Competition and Consumer Commission
Sets out rules and justification for imputation requirements for dominant telecommunications operator.
Focuses on core services, namely local service, domestic access for originating and terminating calls, and
retail services associated with the access services.
Initial Reports Relating to Accounting Separations of Telstra
December 2003.
Australian Competition and Consumer Commission
Provides regulator’s review of initial accounting separations reports provided by dominant
telecommunications operator. Examines both accuracy of reports and the extent to which they comply with
the accounting requirements.
Decision for Approving the Regulation for the Realization, by ‘Romtelecom’ S.A., of Accounting
Separation within the Internal Cost Accounting System
2003.
Romanian National Regulatory Authority for Communications
Describes accounting separations required by the Romanian telecommunications regulator to control cross
subsidization and to comply with the European Union directives.
Regulation and Deregulation of the Motor Carrier Industry
Ames, Iowa: Iowa State University Press, 1989.
Felton, John Richard and Dale G. Anderson
Explains the problem of backhaul price regulation. The U.S. Interstate Commerce Commission rate
regulation caused a duel effect. In the absence of rate competition non-price competition such as more
frequent service can result. Also, spatial imbalances in traffic are exacerbated, resulting in more empty
returns.
The completed acquisition of Northumbrian Water Ltd: A position paper
August 2003.
OFWAT
Sets out ring fencing requirements imposed on an operator as part of an acquisition.
TELECOMMUNICATIONS
TRANSPORTATION
WATER
Case Studies
Ring Fencing and Control of Cross-Subsidization
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Decision: Statement of principles for the regulation of transmission revenues: Information requirements
guidelines
5 June 2002.
Australian Competition and Consumer Commission
Imputation testing (Initial Reports) Record Keeping and Reporting Rules, August 2003; Explanatory
Statement: Imputation Testing Record Keeping Rule
September 2003.
Australian Competition and Consumer Commission
Initial Reports Relating to Accounting Separations of Telstra
December 2003.
Australian Competition and Consumer Commission
The completed acquisition of Northumbrian Water Ltd: A position paper
August 2003.
OFWAT
Decision for Approving the Regulation for the Realization, by ‘Romtelecom’ S.A., of Accounting
Separation within the Internal Cost Accounting System
2003.
Romanian National Regulatory Authority for Communications
Earnings Measurement
http://regulationbodyofknowledge.org/financial-analysis/references/earnings-measurement/[17/01/13 10:10:49 PM]
Financial Analysis
Identifying Informational
Requirements
Basic Financial Statements
Regulatory Systems of
Accounts
Ring Fencing and Control of
Cross-Subsidization
Earnings Measurement
Determination of Cost of
Capital (Debt and Equity),
Including With Scarce or
Unreliable Cost Information
Financing and Risk Mitigation
Data Sources
Systems for Obtaining and
Managing Information
Measures to Improve Data
Quality
Systems for Reporting
Information and Public Access
to Information
You're in the section: Financial Analysis -> Annotated Reading List -> Earnings Measurement
Restructuring and Managing the Enterprise in Transition
Washington, D.C.: The World Bank, 1998, Chapters 2-3.
Crum, Roy L., and Itzhak Goldberg
Focuses on transitioning economies. Describes asset valuation for the balance sheet and techniques for
adjusting for inflation.
Resetting Price Controls for Privatized Utilities: A Manual for Regulators
Washington, D.C.: World Bank, 1999, Chapter 7.
Green, Richard, and Martin Rodriguez Pardina
Considers regulatory treatment of investment, depreciation, and the asset base. Examines whether to value
assets at historical cost or replacement cost. Also considers valuation at time of privatization.
Privatisation of Utilities and the Asset Value Problem
CMPO, University of Bristol, 2001.
Grout, Paul A., Andrew Jenkins, and Ania Zalweska
Examines the effects of the market value approach to asset valuation. Finds that this approach magnifies
and entrenches errors. Recommends the regulatory agency estimate its own value of the company.
Replacement Cost Asset Valuation and Regulation of Energy Infrastructure Tariffs
ABACUS 39(1): 1-41, 2003.
Johnstone, D. J.
Examines the consequences of valuing assets based on an optimized replacement cost methodology.
Argues that the approach values sunk infrastructure as if it were new infrastructure.
The Economics of Regulation: Principles and Institutions
Cambridge, MA: MIT Press, 1988, Reissue Edition, vol. I, Chapters 2 and 4.
Kahn, Alfred
Describes how to determine the rate base. Provides analysis of U.S. legal issues in rate base valuation.
Considers fair value, current value, and original cost. Describes the problems of each for the regulatory
process. Examines choices of replacement versus original cost in the context of efficient pricing.
Current Cost Accounting Methodology for Telstra’s Subsequent Reports under the Accounting
Earnings Measurement
Asset Valuation TechniquesCore References
Sectoral ReferencesTELECOMMUNICATIONS
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Earnings Measurement
http://regulationbodyofknowledge.org/financial-analysis/references/earnings-measurement/[17/01/13 10:10:49 PM]
Separation Regime: Framework Document
January 2004.
Australian Competition and Consumer Commission
Describes regulator’s requirements for accounting separations for dominant telecommunications operator
under a current cost accounting scheme. Outlines government’s requirements and regulator’s objectives.
Describes anti-competitive conduct that is of concern. Considers issues of asset valuation and capital
maintenance. Summarizes international developments.
A Contrasting Approach to Road Sector Reforms: The Case Study of Uganda Experience
Sub-Saharan Africa Transport Program Discussion Paper, number 1, World Bank, Washington, D.C., 2003.
Kumar, Aja
Documents Uganda’s experience some aspects of design and implementation of road management and
financing reforms. Key features of the reform process were: (a) development of an analytical basis to
review different road financing and management options; (b) commitment and ownership of the reform
program; (c) perception of transport as one of the important sectors of the economy; and (d) development
of a sector investment policy and plan.
Review of Asset Values, Costs and Cost Allocation of Western Australian Urban Water and Wastewater
Service Providers: General Principles and Methodology
Melbourne, Australia; The Allen Consulting Group, 2005.
Allen Consulting Group
Examines the appropriate regulatory asset value, forecasting operating expenditure, evaluation of capital
expenditures, cost allocation methodologies, and estimating short-run marginal costs and long-run marginal
costs of water and sewerage service provision.
The Capital Structure of Water Companies
October 11, 2002.
OXERA
Examines appropriate capital structure for water companies in the U.K. Considers effects of capital
structure on the cost of capital, whether an operator should be expected to choose an optimal capital
structure from the regulator’s perspective, and appropriate regulatory responses to capital structure issues.
Tariff Setting Guidelines: A Reduced Discretion Approach for Regulators of Water and Sanitation
Services
Public-Private Infrastructure Advisory Facility (PPIAF), Working Paper no. 8, 2009.
Shugart, Chris and Ian Alexander
Provides specific guidelines for tariff setting for water and sanitation services, in addition to describing
basic principles. Addresses price reviews, allowed revenue, appropriate amounts for operating expenses,
valuing regulatory assets, foreign exchange adjustments, cost of capital, capital maintenance charges,
capital expenditures, and extraordinary reviews.
Valuation: Measuring and Managing the Value of Companies
Wiley Publishers, 2000, Chapter 1.
Copeland, Thomas E., Tim Koller, Jack Murrin
Describes why valuing companies is important for all stakeholders and how shareholders move capital
among enterprises based on return on investment.
Regulatory Opportunism and Asset Valuation: Evidence from the US Supreme Court and UK Regulation
CMPO, University of Bristol, 2001.
Grout, Paul A. and Andrew Jenkins
TRANSPORTATION
WATER
Other References
Earnings Measurement
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Compares the evolution of the treatment of the asset base in the U.S. and the U.K. Finds that operators
and regulators both behave opportunistically with respect to asset valuation policies, namely that policy
preferences are influenced by how the policies affect prices.
Rate base, Assets, Original cost, Replacement cost, Fair value, Current cost, Regulatory Assets
Principles for determining regulatory depreciation allowances
Note to the Independent Pricing and Regulatory Tribunal of New South Wales, September 2003.The Allen
Consulting Group
Develops guidelines for deprecation based largely on efficiency considerations. Examines the implications
of these guidelines for regulatory depreciation policies.
Infrastructure Concessions, Information Flows, and Regulatory Risk.
Note no. 203 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, December 1999.
Burns, P., and A. Estache
States that the regulator needs to evaluate operating costs, which may be based on other firms
(exogenous information) or firm-specific information (historical or current). Considers how incentives
affecting operating expenditure and investment work together. Explains that if operating expenditure is
subject to strong incentives through yardstick competition but capital expenditure is automatically rolled
forward into a regulatory asset base, this may distort efficiency incentives and input choices. Examines
when privatized utilities sell assets at a value quite different from (usually less than) the current cost
valuation. Says that where possible, regulators have steered away from using current cost values as a
basis for regulation and instead have derived a regulatory value based on the flotation value of the assets,
rolled forward by net investment.
Resetting Price Controls for Privatized Utilities: A Manual for Regulators
Washington, D.C.: World Bank, 1999, Chapters 6 – 8.
Green, Richard, and Martin Rodriguez Pardina
Examines operating costs, investments, and revenues. Considers forecasting of operating expenses,
yardstick competition, depreciation methods, and revenue forecasting.
The Economics of Regulation: Principles and Institutions
Cambridge, MA: MIT Press, 1988, Reissue Edition, vol. I, Chapters 2 and 4.
Kahn, Alfred
Discusses the regulation of operating costs and investments. Considers incentives to overstate costs,
effects of deprecation on earnings, transfer pricing, practical problems of overseeing expenditures,
efficiency standards, the role of depreciation and the effects of technology change on depreciation, and
taxes. Explains that regulators set standards for operating costs and conduct audits to ensure that
operators do not inflate costs. Also explains that depreciation is the return of capital expenses to investors.
Rate Case and Audit Manual
Washington, D.C.: National Association of Regulatory Utility Commissioners, 2003.
NARUC Staff Subcommittee on Accounting and Finance
Describes rate base development and expense and revenue items. With respect to rate base, considers
general principles, plant held for future use, plant under construction, cash working capital, customer
deposits, prepayments and aid to construction, deferred income taxes, and depreciation reserves.
Key Words
Principles and Practices of Cost Accounting for the Treatment ofOperating Costs, Capital Expenditures, Depreciation, Unpaid Bills,Customer or Government-Provided Capital, and Imputed RevenueCore References
Earnings Measurement
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Regarding expenses, considers depreciation, salaries, fuel, pensions, postretirement benefits, regulatory
expenses, contract services, and insurance. Regarding revenues, considers unbilled revenue, unregulated
revenue, and unpaid bills. Also examines affiliate transactions.
Assets, Valuation, Costs, Capital Expenses, Operating Expenses, Investment, Information, Accounting,
Depreciation
The Regulation of Investment in Utilities: Concepts and Applications
Washington, D.C.: The World Bank, 2005.
Alexander, Ian, and Clive Harris
Examines approaches for determining whether assets should be included in the rate base.
Infrastructure Concessions, Information Flows, and Regulatory Risk.
Note no. 203 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, December 1999.
Burns, P., and A. Estache
Discusses how to treat investment over- or under-spend relative to forecasts at each regulatory review.
Holds that investment may be postponed or even canceled, often for legitimate reasons. Investment also is
often lumpy, which makes forecasting investment difficult and wrought with errors. Examines the operator’s
incentive to pass the cash that would have been used for investment to shareholders and the effects of
clawing back money on investment incentives.
Regulatory Risk and the Cost of Capital: Determinants and Implications for Rate Regulation
New York: Springer. 2006.
Pedell, Burkhard
Examines different approaches for valuing rate base. Provides case examples of gas utilities in New
Zealand.
Resetting Price Controls for Privatized Utilities: A Manual for Regulators
Washington, D.C.: World Bank, 1999, Chapters 5 and 7.
Green, Richard, and Martin Rodriguez Pardina
Explains that the operator has an incentive to overstate future investment needs, so the regulator may
need to assess the forecasts. Describes how to protect the operator from attempts by the regulator to
reduce asset base. Describes how, after an opening asset base has been set, the future asset base level
is calculated by adding actual investment and subtracting depreciation from the initial asset base.
Discusses the effects of depreciation on the present value of the company and current and future
consumers. Depreciation policies are examined.
Rolling forward the regulatory asset bases of the electricity and gas industries: Discussion Paper
Independent Pricing and Regulatory Tribunal in New South Wales, 1999.
IPART
Examines issues of initial valuation of the rate base, customer provided capital, depreciation, indexation,
stranded assets, incorporating new assets, and regulatory accounts.
Rate Case and Audit Manual
Washington, D.C.: National Association of Regulatory Utility Commissioners, 2003.
NARUC Staff Subcommittee on Accounting and Finance
Describes rate base development and calculation. Considers general principles, plant held for future use,
Key Words
Treatment of Investment in Price Controls and the Developmentof the Rate BaseCore References
Earnings Measurement
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plant under construction, cash working capital, customer deposits, prepayments and aid to construction,
deferred income taxes, and depreciation reserves.
Western Grain Railway Revenue Cap Interpretations
Ottawa – March 16, 2001.
Canadian Transportation Agency
Provides an interpretation of the Canadian statutes that set the policy framework for a revenue cap on the
movement of grain by the Canadian railways.
Questions and answers on the Railway Revenue Cap
Ottawa – 2008.
Canadian Transportation Agency
Explains the operations of the revenue cap on grain transportation. Two examples are used to illustrate
how the maximum revenue under the cap would be calculated.
Tariff Setting Guidelines: A Reduced Discretion Approach for Regulators of Water and Sanitation
Services
Public-Private Infrastructure Advisory Facility (PPIAF), Working Paper no. 8, 2009.
Shugart, Chris and Ian Alexander
Provides specific guidelines for tariff setting for water and sanitation services, in addition to describing
basic principles. Addresses price reviews, allowed revenue, appropriate amounts for operating expenses,
valuing regulatory assets, foreign exchange adjustments, cost of capital, capital maintenance charges,
capital expenditures, and extraordinary reviews.
Asset Accumulation and its Effects on NIE’s Transmission and Distribution Price Control: A
Consultation Paper
Director General of Electricity Supply for Northern Ireland, 2000.
Ofgem
Studies an operator’s investment patterns, benchmarks these patterns against other operators, and
examines how these patterns affect prices and quality.
Rate base, Costs, Assets, Asset valuation, Investment, Information, Prudency, Used and useful
Resetting Price Controls for Privatized Utilities: A Manual for Regulators
Washington, D.C.: World Bank, 1999, Chapters 5 and 7.
Green, Richard, and Martin Rodriguez Pardina
Discusses effects of corporate taxes on regulated companies, including the effects on cash flow and the
cost of debt.
The Economics of Regulation: Principles and Institutions
Cambridge, MA: MIT Press, 1988, Reissue Edition, vol. I, Chapter 2.
Kahn, Alfred
Discusses effects of corporate taxes on cash flow and the cost of debt.
Rate Case and Audit Manual
Washington, D.C.: National Association of Regulatory Utility Commissioners, 2003.
Sectoral ReferencesTRANSPORTATION
WATER
Other References
Key Words
TaxationCore References
Earnings Measurement
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NARUC Staff Subcommittee on Accounting and Finance
Describes treatment of taxes for calculating revenue requirement, applying tax reserves, and estimating tax
effects.
Road User Taxation in Selected OECD Countries
Sub-Saharan Africa Transport Policy Program Working Paper Series, number 3, World Bank, Washington, D.C.,
1993.
Creightney, Cavelle
Examines issues related to road user taxation, in a selection of “most successful countries”. On the basis
of six case studies, provides a comparative review of policy towards road user taxation, as well as each
country’s approach towards determining the actual rate, or level of tax. Portrays the decision-making
process, and the balance between theoretical organization considerations on the one hand, and broader
economic, or political considerations on the other. While the focus of this paper is on a selection of
developed countries, it is intended to provide insights for developing practical guidelines that improve road
users’ taxes in Sub-Saharan Africa.
Taxes, Assets, Depreciation, Taxation, Cost of capital, Debt, Cash flow
Current Cost Accounting Methodology for Telstra’s Subsequent Reports under the Accounting
Separation Regime: Framework Document
January 2004.
Australian Competition and Consumer Commission
Draft Energy and Water License Compliance Policy
Independent Pricing and Regulatory Tribunal of New South Wales, September 2003.
Independent Pricing and Regulatory Triburnal of New South Wales
Final Determinations. Future Water and Sewerage Charges 2000-05: Periodic Review 1999
November 1999.
OFWAT
Sectoral ReferencesTRANSPORTATION
Key Words
Case Studies
Determination of Cost of Capital (Debt and Equity), Including With Scarce or Unreliable Cost Information
http://regulationbodyofknowledge.org/financial-analysis/references/determination-of-cost-of-capital/[17/01/13 10:11:23 PM]
Financial Analysis
Identifying Informational
Requirements
Basic Financial Statements
Regulatory Systems of
Accounts
Ring Fencing and Control of
Cross-Subsidization
Earnings Measurement
Determination of Cost of
Capital (Debt and Equity),
Including With Scarce or
Unreliable Cost Information
Financing and Risk Mitigation
Data Sources
Systems for Obtaining and
Managing Information
Measures to Improve Data
Quality
Systems for Reporting
Information and Public Access
to Information
You're in the section: Financial Analysis -> Annotated Reading List -> Determination of Cost of Capital
(Debt and Equity), Including With Scarce or Unreliable Cost Information
1. Estimating the cost of capital with limited or unreliable information
2. Cost of Deb
3. Cost of Equity
4. Role of Taxes
5. Weighted Average Cost of Capital, including the choice of weightings
6. Foreign Currency Risk
A Back-of-the-Envelope Approach to Assess the Cost of Capital for Network Regulators
The World Bank, December 1997.
Alexander, I., and A. Estache
Provides a description of how to estimate cost of capital in a developing country context.
Infrastructure Concessions, Information Flows, and Regulatory Risk.
Note no. 203 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, December 1999.
Burns, P., and A. Estache
Holds that regulators need to compute the weighted average cost of total capital (debt plus equity) to
ensure a return to investors and sustain the asset base. Describes how to identify the cost of debt.
Examines techniques for estimating the cost of equity with market data. Finds that in developing countries,
however, concessionaires are often unlisted, so market data are not available, or the concessionaires may
be part of a larger conglomerate, so market data will cover not only the regulated activity but others as
well. Examines using comparators to solve these problems. Also discusses using benchmark ratios based
on international best practice.
Gas Control Inquiry: Final Report
New Zealand, 2004.
Commerce Commission of New Zealand
Explains components of the weighted average cost of capital and how to estimate them. Provides cases
using gas companies in New Zealand.
The Cost of Capital and Access Arrangements
in Infrastructure Regulation and Market Reform: Principles and Practice, edited by Margaret Arblaster and Mark
Jamison. Canberra, Australia: ACCC and PURC, 1998, pp. 161-184.
Davis, Kevin, and John C. Handley
Determination of Cost of Capital (Debt and Equity),Including With Scarce or Unreliable Cost Information
Core References
Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
Home About Introduction Overview Glossary Frequently Asked Questions
Determination of Cost of Capital (Debt and Equity), Including With Scarce or Unreliable Cost Information
http://regulationbodyofknowledge.org/financial-analysis/references/determination-of-cost-of-capital/[17/01/13 10:11:23 PM]
Analyzes cost of capital methodologies. Considers the importance of access arrangements, alternatives to
the Capital Asset Pricing Model, factors affecting the derivation of beta risk and the feasibility of
international benchmarks, determination of beta risk for an operator with markets with different levels of
competition, the impact of price cap regulation, the treatment of depreciation in the cost of capital, the
relationship between beta risk, pricing principles and asset valuation methodologies, and the treatment of
stranded assets.
Taxation and the Cost of Capital: A Review of Overseas Experience
NERA, April 1999.
Houston, Greg, Jeff Makholm, Richard Hern, and Ann Whitfield
Examines issues of nominal versus real approaches to the weighted average cost of capital, pre-tax versus
post-tax formulations, and the use of short versus long-term estimates of the effective tax rate.
The Cost of Capital: Intermediate Theory
Cambridge UK: Cambridge University Press, 2005.
Armitage, Seth
Describes issues regarding how to measure the cost of capital.
Regulation and the Cost of Capital
in Crew, M. and D. Parker, eds., International Handbook on Economic Regulation, Northhampton, MA: Elgar,
2008.
Jenkinson, Tim
Discusses difficulties in estimating risk and the appropriate equity cost of capital. Examines the trend
towards high levels of debt in utility capital structures. Discusses whether capital structure should be
regulated. Finally, examines issue of “financeability” – whether the projected revenues, profits and cash
flows are such as to enable the company to maintain a strong credit rating.
Regulatory Risk and the Cost of Capital: Determinants and Implications for Rate Regulation
New York: Springer. 2006.
Pedell, Burkhard
Develops a comprehensive concept of regulatory risk using theoretical and empirical research, focusing on
how the design of the regulatory system influences the risk of a rate-regulated firm. Also examines
appropriate methods for determining rate base and the allowed rate of return.
A Study into Certain Aspects of the Cost of Capital for Regulated Utilities in the U.K.
Smithers & Co Ltd, London, U.K. February 13, 2003.
Wright, Stephen, Robin Mason, and David Miles
Examines key areas of the cost of capital, including the common components of the cost of equity, a
comparison of asset pricing models for regulation, practical issues in estimation of asset pricing parameters
for utilities, the case for consistency in setting the cost of capital, and regulatory risk.
The Rate of Return for Electricity Distribution
IPART Discussion Paper, Sydney, Australia, November 1998.
Independent Pricing and Regulatory Tribunal of New South Wales
Describes processes for estimating the cost of capital. Explains with cost of capital is important. Covers
weighted average cost of capital, effective tax rate, cost of equity, cost of debt, and inflation.
Testing for Financeability: An Assessment
2006.
OXERA
Examines rationale for Ofwat’s financeability adjustments in the 2004 periodic review and the potential for
Sectoral ReferencesELECTRICITY
WATER
Determination of Cost of Capital (Debt and Equity), Including With Scarce or Unreliable Cost Information
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alternative approaches.
The Capital Structure of Water Companies
October 11, 2002.
OXERA
Examines appropriate capital structure for water companies in the U.K. Considers effects of capital
structure on the cost of capital, whether an operator should be expected to choose an optimal capital
structure from the regulator’s perspective, and appropriate regulatory responses to capital structure issues.
Regulatory Structure and Risk and Infrastructure Firms: An International Comparison
Policy Research Working Paper No 1698, The World Bank, 1996.
Alexander, I., Mayer, C. and Weeds, H.
Provides an econometric analysis of how forms of regulation affect cost of capital.
Understanding Risk & Return
2001 Marshal Lectures, University of Cambridge, 2001.
Campbell, John Y.
Explains why simple models have difficulty explaining some puzzles in asset pricing.
Corporate Ratings Criteria
2003.
Standard & Poor’s
Describes Standard & Poor’s criteria for rating corporations, including industrials and utilities. Considers
country risk, sovereign risk, cyclicality, regulation, and loan covenants.
Cost of Capital, Equity, Debt, Taxes, WACC, CAPM, Risk
Draft Energy and Water License Compliance Policy
Independent Pricing and Regulatory Tribunal of New South Wales, September 2003.
Independent Pricing and Regulatory Triburnal of New South Wales
The Cost of Capital Estimation for Fixed Telecommunications Services: A Final Report for OFTA
August 2000.
National Economics Research Associates (NERA)
BGE’s Cost of Capital: A Final Report for the Commission for Energy Regulation
August 2003.
NERA
Final Determinations. Future Water and Sewerage Charges 2000-05: Periodic Review 1999
November 1999.
OFWAT
A Study into Certain Aspects of the Cost of Capital for Regulated Utilities in the U.K.
Smithers & Co Ltd, London, U.K. February 13, 2003.
Wright, Stephen, Robin Mason, and David Miles
Other References
Key Words
Case Studies
Determination of Cost of Capital (Debt and Equity), Including With Scarce or Unreliable Cost Information
http://regulationbodyofknowledge.org/financial-analysis/references/determination-of-cost-of-capital/[17/01/13 10:11:23 PM]
Financing and Risk Mitigation
http://regulationbodyofknowledge.org/financial-analysis/references/financing-and-risk-mitigation/[17/01/13 10:11:57 PM]
Financial Analysis
Identifying Informational
Requirements
Basic Financial Statements
Regulatory Systems of
Accounts
Ring Fencing and Control of
Cross-Subsidization
Earnings Measurement
Determination of Cost of
Capital (Debt and Equity),
Including With Scarce or
Unreliable Cost Information
Financing and Risk Mitigation
Data Sources
Systems for Obtaining and
Managing Information
Measures to Improve Data
Quality
Systems for Reporting
Information and Public Access
to Information
You're in the section: Financial Analysis -> Annotated Reading List -> Financing and Risk Mitigation
Financing Water Supply and Sanitation Investments: Utilizing Risk Mitigation Instruments to Bridge the
Financing Gap
World Bank: Water Supply and Sanitation Sector Board Discussion Paper Series, Paper No. 4, January 2005.
Baietti, Aldo, and Peter Raymond
Examines instruments for mitigating risks in water investment. Considers foreign exchange risk, use of
guarantees, creating creditworthiness, and hybrid financing methods.
Analysis of Power Projects with Private Participation under Stress
Washington, D.C.: The World Bank, 2005.
Covindassamy, M. Ananda, Daizo Oda, and Yabei Zhang
Examines issues of distress in private participation situations. Concludes that reforms without a strong
consensus is a major cause of distress for power projects and that power projects need financial
instruments to address macroeconomic instability while maintaining politically sustainable prices.
Mobilizing Private Finance with IBRD/IDA Guarantees to Bridge the Infrastructure Funding Gap
Washington, D.C.: The World Bank, 2007.
Delmon, Jeff
Describes guarantees that the International Bank for Reconstruction and Development (IBRD) and the
International Development Association (IDA) use to catalyze private finance for infrastructure. Examines
partial risk guarantees (PRGs) and partial credit guarantees (PCGs).
Government Guarantees: Allocating and Valuing Risk in Privately Financed Infrastructure Projects
Washington, D.C.: The World Bank, 2007.
Irwin, Timothy
Reviews history of government guarantees and identifies obstacles to good decisions. Provides a
framework for judging when governments should bear risk in an infrastructure project. Explains how
guarantees can be valued.
Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and
Developments
Washington, D.C.: The World Bank, 2007.
Matsukawa, Tomoko, and Odo Habeck
Provides a guide and reference information for practitioners of infrastructure financing. Covers the different
types and nature of risk mitigation instruments currently available for private financiers. Describes recent
trends in risk mitigation for developing country infrastructure financing. Summarizes characteristics of
Financing and Risk Mitigation
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Financing and Risk Mitigation
http://regulationbodyofknowledge.org/financial-analysis/references/financing-and-risk-mitigation/[17/01/13 10:11:57 PM]
providers and their compatibility.
Financing Networks: A Discussion Paper
2006.
Ofwat and Ofgem
Examines impacts of gearing on management incentives, risk, and regulatory discretion. Discusses how
regulators might ring fence gearing.
Project Finance: Case Studies
Euromoney Books, 2000.
Davis, Henry
Provides numerous case studies of the finance of infrastructure projects in developing nations.
Financeability
in CRI Regulatory Review – 2006/2007, University of Bath School of Management, pp. 421-444.
Mason, Keith
Energy Stalemate: Independent Power Projects and Power Sector Reform in Ghana
Working Paper, Management Program in Infrastructure Reform & Regulation, University of Cape Town Graduate
School of Business, 2008.
Malgas, Isaac
Through the Fire: Independent Power Projects and Power Sector Reform in Côte d’Ivoire
Working Paper, Management Program in Infrastructure Reform & Regulation, University of Cape Town Graduate
School of Business, 2008.
Malgas, Isaac, and Katherine Nawaal Gratwick
Case Studies
Data Sources
http://regulationbodyofknowledge.org/financial-analysis/references/data-sources/[17/01/13 10:12:30 PM]
Financial Analysis
Identifying Informational
Requirements
Basic Financial Statements
Regulatory Systems of
Accounts
Ring Fencing and Control of
Cross-Subsidization
Earnings Measurement
Determination of Cost of
Capital (Debt and Equity),
Including With Scarce or
Unreliable Cost Information
Financing and Risk Mitigation
Data Sources
Systems for Obtaining and
Managing Information
Measures to Improve Data
Quality
Systems for Reporting
Information and Public Access
to Information
You're in the section: Financial Analysis -> Annotated Reading List -> Data Sources
IBNET Water and Sanitation Services Database
http://www.ib-net.org.
The International Benchmarking Network for Water and Sanitation Utilities (IBNET) provides the world’s
largest database on water and sanitation utilities performance. The data are designed to be useful for
benchmarking. Site also contains tools.
Private Participation in Infrastructure Database
http://ppi.worldbank.org.
The PPI database contains information on PPI arrangements around the world.
Benchmarking Data for the Electricity Distribution Sector in Latin America and the Caribbean, 1995-2005
The World Bank.
Contains detailed information on 25 countries and 249 utilities in the region. Data represent 88 percent of
the electrification in the region. Intended for benchmarking output, coverage, input, labor productivity,
operating performance, the quality of service, prices, and ownership.
Data Sources
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Systems for Obtaining and Managing Information
http://regulationbodyofknowledge.org/financial-analysis/references/systems-for-obtaining-and-managing-information/[17/01/13 10:13:03 PM]
Financial Analysis
Identifying Informational
Requirements
Basic Financial Statements
Regulatory Systems of
Accounts
Ring Fencing and Control of
Cross-Subsidization
Earnings Measurement
Determination of Cost of
Capital (Debt and Equity),
Including With Scarce or
Unreliable Cost Information
Financing and Risk Mitigation
Data Sources
Systems for Obtaining and
Managing Information
Measures to Improve Data
Quality
Systems for Reporting
Information and Public Access
to Information
You're in the section: Financial Analysis -> Annotated Reading List -> Systems for Obtaining and
Managing Information
Energy Regulatory Commission Web Sites Don’t Click
(2000) Energy E-Comm.com.
Energy E-Comm.com
Describes best practices for web use by regulatory agencies, including providing up to date information on
a wide range of topics, links to and information on operators, contact information, maps to offices,
commissioners pictures and biographies, agenda schedules, how to file a complaint, and a directory of
personnel.
Privacy Impact Assessment Guidelines: An Essential Tool for Data Protection
Victoria, BC, Canada: David H. Flaherty, Inc., 2001.
Flaherty, David
An online guide to assessing privacy needs and impacts of government information on privacy.
Information, Transparency, Privacy, e-Government
Regulation of New South Wales Electricity Distribution Networks: Determination and Rules Under the
National Electricity Code
IPART, Sydney, Australia, December 1999.
Independent Pricing and Regulatory Tribunal of New South Wales
Systems for Obtaining and Managing Information
Core References
Other References
Key Words
Case Studies
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Measures to Improve Data Quality
http://regulationbodyofknowledge.org/financial-analysis/references/measures-to-improve-data-quality/[17/01/13 10:13:39 PM]
Financial Analysis
Identifying Informational
Requirements
Basic Financial Statements
Regulatory Systems of
Accounts
Ring Fencing and Control of
Cross-Subsidization
Earnings Measurement
Determination of Cost of
Capital (Debt and Equity),
Including With Scarce or
Unreliable Cost Information
Financing and Risk Mitigation
Data Sources
Systems for Obtaining and
Managing Information
Measures to Improve Data
Quality
Systems for Reporting
Information and Public Access
to Information
You're in the section: Financial Analysis -> Annotated Reading List -> Measures to Improve Data Quality
Measuring the Impact of Energy Reform – Practical Options
Note no. 210 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, May 2000.
Foster, Vivien
Describes how to gather and process information on the effects of energy reforms on the poor.
Rate Case and Audit Manual
Washington, D.C.: National Association of Regulatory Utility Commissioners, 2003.
NARUC Staff Subcommittee on Accounting and Finance
Describes auditing purposes and procedures. Includes studying the operator’s accounting system,
analyzing historical data, focusing the audit, reviewing past decisions of the regulatory agency, reviewing
working papers, using external and internal audit reports, contacting other jurisdictions, managing the audit
process, confidentiality procedures, and identifying records to be reviewed.
National Regulatory Reporting for Electricity Distribution and Retailing Businesses
Australian Competition and Consumer Commission, Sidney, 2002.
Utility Regulators Forum
Establishes uniform reporting requirements for electricity distribution providers in Australia.
Information, Assets, Costs, Investment, Social policy
Measures to Improve Data Quality
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Systems for Reporting Information and Public Access to Information
http://regulationbodyofknowledge.org/financial-analysis/references/systems-for-reporting-access/[17/01/13 10:14:13 PM]
Financial Analysis
Identifying Informational
Requirements
Basic Financial Statements
Regulatory Systems of
Accounts
Ring Fencing and Control of
Cross-Subsidization
Earnings Measurement
Determination of Cost of
Capital (Debt and Equity),
Including With Scarce or
Unreliable Cost Information
Financing and Risk Mitigation
Data Sources
Systems for Obtaining and
Managing Information
Measures to Improve Data
Quality
Systems for Reporting
Information and Public Access
to Information
You're in the section: Financial Analysis -> Annotated Reading List -> Systems for Reporting Information
and Public Access to Information
The E-government Handbook for Developing Countries
Washington, D.C.: World Bank, 2002, pp. 1-20.
World Bank
States that developing countries can use e-government practices to provide greater access to government
information, promote civic engagement, make government more accountable, and provide development
opportunities.
Energy Regulatory Commission Web Sites Don’t Click
(2000) Energy E-Comm.com.
Energy E-Comm.com
Describes best practices for web use by regulatory agencies.
The Internet and Public Participation in Rulemaking
Kennedy School of Government, Harvard University, 2003.
Coglianese, Cary
Describes how governments can evaluate use of the Internet to increase public participation.
Privacy Impact Assessment Guidelines: An Essential Tool for Data Protection
Victoria, BC, Canada: David H. Flaherty, Inc., 2001.
Flaherty, David
An online guide to assessing privacy needs and impacts of government information on privacy.
Information, Transparency, Privacy, e-Government
Systems for Reporting Information and Public Access toInformation
Core References
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Incentive Regulation
http://regulationbodyofknowledge.org/glossary/i/incentive-regulation/[17/01/13 10:14:48 PM]
Glossary -> I
Regulation that encourages certain types of corporate behavior. Some incentives can be perverse—discouraging
cost containment. See incentive-based regulation and performance based ratemaking.
Incentive Regulation
Foundationsof Regulation
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Information Gathering
http://regulationbodyofknowledge.org/glossary/i/information-gathering/[17/01/13 10:15:21 PM]
Glossary -> I
Activities related to the collection and assembly of data and information. For example, regulators often collect
income statements from regulated utilities.
Information Gathering
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Regulators
http://regulationbodyofknowledge.org/glossary/r/Regulators/[17/01/13 10:15:54 PM]
Glossary -> R
A term used to refer to members of a government agency responsible for monitoring sector performance,
addressing stakeholder concerns, and implementing government policies. An individual regulator may serve as a
member of a commission that is responsible for balancing the interests of producers, consumers, and political
officials.
Regulators
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Monitoring
http://regulationbodyofknowledge.org/glossary/m/monitoring/[17/01/13 10:16:28 PM]
Glossary -> M
Listening in on telephone conversations between others. Can be used for legal administrative purposes.
Monitoring
Foundationsof Regulation
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Capital
http://regulationbodyofknowledge.org/glossary/c/capital/[17/01/13 10:17:05 PM]
Glossary -> C
Manmade, as opposed to natural, resources (e.g. equipment, buildings); a factor in production.
Capital
Foundationsof Regulation
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Process
http://regulationbodyofknowledge.org/glossary/p/process/[17/01/13 10:17:38 PM]
Glossary -> P
Method used to obtain results. This can include procedures, descriptions of activity flows, or a specified
sequence of tasks.
Process
Foundationsof Regulation
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Financial Statements
http://regulationbodyofknowledge.org/glossary/f/financial-statements/[17/01/13 10:18:12 PM]
Glossary -> F
The collection of a firm’s accounting information including income statement, balance sheet, and statement of
cash flows. These are audited to verify appropriate separation of lines of business for compliance with
regulations prohibiting unfair cross-subsidies and requiring that charges be derived fairly from costs and applied
without discrimination.
Financial Statements
Foundationsof Regulation
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Monitor
http://regulationbodyofknowledge.org/glossary/m/monitor/[17/01/13 10:18:45 PM]
Glossary -> M
To check, observe, or scrutinize. In the case of telecommunications, an employee of an information provider
who participates in or supervises live 900 or 976 calls.
Monitor
Foundationsof Regulation
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Earnings
http://regulationbodyofknowledge.org/glossary/e/earnings/[17/01/13 10:19:21 PM]
Glossary -> E
Revenues minus cost of sales, operating expenses, and taxes, over a given period of time. See net income.
Earnings
Foundationsof Regulation
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Cost of Capital
http://regulationbodyofknowledge.org/glossary/c/cost-of-capital/[17/01/13 10:19:58 PM]
Glossary -> C
The rate of return available on securities of equivalent risk in the capital market. Investors usually require
compensation for risk, so the higher the investment risk, the higher the cost of capital. If a firm is financed by
both debt and equity, its cost of capital is a weighted average of the cost from both sources. Investors are
interested in the after-tax returns, so taxes are taken into account when calculating the weighted average cost
of capital.
Cost of Capital
Foundationsof Regulation
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Net Present Values
http://regulationbodyofknowledge.org/glossary/n/net-present-values/[17/01/13 10:20:35 PM]
Glossary -> N
The value today of anticipated future incomes and expenditures. The formula is shown below, where is the cash
flow in period i and r is the discount rate.
Net Present Values
Foundationsof Regulation
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Value
http://regulationbodyofknowledge.org/glossary/v/value/[17/01/13 10:21:09 PM]
Glossary -> V
The Worth or utility of a product or service. The market value (of, say, a firm’s stock) would be determined by
the forces of supply and demand—where the price reflects expectations about the timing, level, and risk of
future cash flows. One can also consider the value of a product or service consumed by citizens in terms of
their willingness to pay for that product or service. The social value would incorporate additional benefits (or
costs) that are not reflected in the market price.
Value
Foundationsof Regulation
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Public
http://regulationbodyofknowledge.org/glossary/p/public/[17/01/13 10:21:43 PM]
Glossary -> P
Availability of shares to investors in the financial market. Privately-owned, publicly-traded firms include investor
owned utilities. Also, the term is used to refer to citizens in general, as when a meeting is “open to the public.”
Public
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Access
http://regulationbodyofknowledge.org/glossary/a/access/[17/01/13 10:22:16 PM]
Glossary -> A
1. Ability for a potential entrant to enter a market. Alternatively, in a network industry, the ability for a consumer
to have a connection so as to obtain a service. Access often requires initial fixed investment by the supplier
(such as distribution facilities), so pricing access becomes a regulatory issue.
2. A connection to the utility service, such as connection a local telephone line or to an electric distribution line.
Access
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Issues In Regulating the Price Level
http://regulationbodyofknowledge.org/price-level-regulation/issues-in-regulating-the-price-level/[17/01/13 10:22:52 PM]
Basic Forms of Regulation
Incentive Features and Other
Properties
Features of Price Cap and
Revenue Cap Regulation
Earnings Sharing
Issues In Regulating the Price
Level
Properties of Benchmarking
and Yardstick Analyses
Conducting A Price Review
Concluding Observations
Related FAQs
Annotated Reading List
You're in the section: Price Level Regulation -> Issues In Regulating the Price Level
Two issues are common to most forms of incentive regulation. The first issue is how to treat extraordinary
events that impact earnings. In rate of return regulation, where high or low earnings relative to the cost of capital
trigger price reviews, it is unusual for the regulator to make price adjustments simply because of an
extraordinary event. Instead, the regulator normalizes the financial impact of the event, which means that the
regulator spreads the effect over time. With price cap regulation, the price cap index captures how the event
affects the average firm in the economy, so the regulator considers the impact of the event only if the event
affects the operator disproportionately relative to the average firm in the economy. If the effect on the operator
is disproportionate, then the regulator considers the extent to which the effect of the event on the operator is
within the operator’s control because, for the incentives built into price cap regulation to be effective, the
regulator should not intervene in areas where the operator should be taking action. Following this analysis, if
the event affects the operator disproportionately and if the effects are beyond the operator’s control, then the
regulator may make a price adjustment. The situation for revenue cap regulation is the same as that for price
cap regulation. With benchmarking, the regulator first considers whether the event affects this operator
disproportionately relative to the other operators included in the benchmarking analysis. If the effect is
disproportionate, then the regulator again considers the extent to which the operator can affect the impact of the
event.
The second and related issue that is common to all of the forms of regulation, except pure price caps, is the
treatment of controllable and non-controllable costs. Controllable costs are those that the operator can influence
and, conversely, non-controllable costs are those that the operator cannot influence. In some instances the
regulator allows the operator to pass through to customers changes in non-controllable costs. A historical
example is the cost of fuel for electricity generation. This price was traditionally considered beyond the control
of the electricity generator. For this reason, and because fuel was a significant portion of the cost of generation
and fluctuated frequently, regulators frequently allowed changes in fuel prices to be passed through to
customers.
Issues In Regulating the Price Level Sections
Foundationsof Regulation
MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
RegulatoryProcess
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Basic Forms of Regulation
http://regulationbodyofknowledge.org/price-level-regulation/basic-forms-of-regulation/[17/01/13 10:23:26 PM]
Basic Forms of Regulation
Incentive Features and Other
Properties
Features of Price Cap and
Revenue Cap Regulation
Earnings Sharing
Issues In Regulating the Price
Level
Properties of Benchmarking
and Yardstick Analyses
Conducting A Price Review
Concluding Observations
Related FAQs
Annotated Reading List
You're in the section: Price Level Regulation -> Basic Forms of Regulation
There are four primary approaches to regulating the overall price level1 – rate of return (or cost of
service) regulation, price cap regulation, revenue cap regulation,
and benchmarking (or yardstick regulation).2 Rate of return regulation adjusts overall price levels according to
the operator’s accounting costs and cost of capital. In most cases, the regulator reviews the operator’s overall
price level in response to a claim by the operator that the rate of foreturn that it is receiving is less than its cost
of capital, or in response to a suspicion of the regulator or claim by a consumer group that the actual rate of
return is greater than the cost of capital. However regulators in some countries practice rate of return
regulation by scheduling price reviews in advance, such as conducting an annual price review. Determination of
Cost of Capital in Financial Analysis describes how rate of return and cost of capital are calculated. Once
the regulator, using rate of return regulation, has decided to review the operator’s price level, she estimates the
operator’s actual rate of return, applying the prudency, used and useful, and known and measureable standards
discussed in the Asset Valuation Techniques section of Financial Analysis. The regulator also identifies what
she believes to be the operator’s cost of capital and orders a rate level change that is intended to bring the
actual rate of return in line with the cost of capital.
Price cap regulation,3 which is sometimes called RPI-X regulation,4 allows the operator to change its price level
according to an index that is typically comprised of an inflation measure, I, and a “productivity offset,” which is
more commonly called the X-factor. The precise meaning of the X-factor and principles for choosing I are
described in more detail below. Typically with price cap regulation, the regulator groups services into price or
service baskets and establishes an I – X index, called a price cap index, for each
basket.5 Establishing price baskets allows the operator to change prices within the basket as the operator sees
fit as long as the average percentage change in prices for the services in the basket does not exceed the price
cap index for the basket.6
Revenue cap regulation7 is similar to price cap regulation in that the regulator establishes an I – X index, which
in this case is called a revenue cap index, for service baskets and allows the operator to change prices within
the basket so long as the percentage change in revenue does not exceed the revenue cap index. Revenue
cap regulation is more appropriate than price cap regulation when costs do not vary appreciably with units
of sales. An example might be electricity distribution where distribution lines drive costs, but prices are often
based on kilowatt-hours of electricity sold.8 Revenue caps also relieve the regulator from the duty of
overseeing price structures, which in some cases can be costly to regulate because they are complex.
Benchmarking is comparative competition in that the operator’s performance is compared to other operators’
performance and penalties or awards are assessed based on the operator’s relative performance.9 For example,
the regulator might identify a number of comparable operators and compare their cost efficiency. The most
efficient operators would be rewarded with extra profits and the least efficient operators would be penalized.
Basic Forms of Regulation Sections
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Basic Forms of Regulation
http://regulationbodyofknowledge.org/price-level-regulation/basic-forms-of-regulation/[17/01/13 10:23:26 PM]
Because the operators are actually in different markets, it is important to make sure that the operators’
situations are similar so that the comparison is valid, and to use statistical techniques to adjust for any
quantifiable differences over which the operators have no control. As noted elsewhere, benchmarking is rarely
used by itself and is commonly combined with price cap regulation as an input for determining the X-factor.
The two most common forms of statistical analysis used in benchmarking are data envelopment analysis (DEA)
and regression analysis. DEA estimates the cost level an efficient firm should be able to achieve in a
particular market. Using DEA analysis the regulator would reward operators whose costs are near the efficient
frontier with additional profits. Regression analysis estimates what the average firm should be able to achieve.
Using regression analysis the regulator would reward firms that performed better than average and penalize
firms that performed worse than average.
Recently, regulators have begun using a virtual company approach in which analysts construct a simulation
model of the operator and estimate the cost level of an efficient operator. The virtual company approach is
subject to strategic behavior by analysts because the model represents what the analyst says
the operator should do, which is by design not what the operator really does. With any approach, best practices
indicate that the regulator should account for varying operating conditions across firms and that are beyond
the operators’ control. Such factors could include macroeconomic conditions, geography, demographics, and
history.
Some regulators release benchmarking information to the media. If the media publish the information, this has
the advantage of bringing public pressure on poorly performing operators.
Generally regulators use a combination of these basic forms of regulation. Combining forms of regulation is
called hybrid regulation. For example, U.K. regulators combine elements of rate of return regulation and price
cap regulation to create their form of RPI-X regulation. Some regulators use earnings sharing,10 which is an
approach that allows the operator to keep some portion of its earnings above its cost of capital and bear some
portion of the difference if earnings are below the cost of capital. Revenue sharing is another option in which
the operator keeps only some portion of revenue changes.
1. See Principles.
2. In practice benchmarking or yardstick regulation is an input used in price cap or revenue cap regulation,
and sometimes in rate of return or cost of service regulation.
3. See Price Regulation.
4. RPI stands for Retail Prices Index and is a measure of inflation used in the United Kingdom.
5. Because of this feature, some authors refer to price cap regulation as service basket or price basket
regulation.
6. As Tariff Design explains, in many instances the regulator and the operator are in agreement on how
prices should be designed. This feature of price cap regulation allows the operator to use his superior
information to make decisions that the regulator would also make if she had the same information as the
operator.
7. See Revenue Caps.
8. In some instances regulators combine price and revenue caps, applying price caps to costs that vary with
sales and revenue caps to costs that do not vary with sales.
9. See Principles of Using Efficiency Measures for Yardstick Regulation. See Market Structure and
Competition for information about competition in the market and competition for the market.
10. See Earnings and Revenue Sharing Techniques. In U.K.-style price cap regulation, financial modeling is
used to estimate the X-factor. In these approaches, the cash outflows of the operator are forecasted as is
the rate base value that will exist at the end of the price control period. These values are discounted back to
the present. Then revenues are forecasted, using an iterative process until the net present value of the
enterprise is zero.
Footnotes
Basic Forms of Regulation
http://regulationbodyofknowledge.org/price-level-regulation/basic-forms-of-regulation/[17/01/13 10:23:26 PM]
Incentive Features and Other Properties
http://regulationbodyofknowledge.org/price-level-regulation/incentive-features-and-other-properties/[17/01/13 10:24:02 PM]
Basic Forms of Regulation
Incentive Features and Other
Properties
Features of Price Cap and
Revenue Cap Regulation
Earnings Sharing
Issues In Regulating the Price
Level
Properties of Benchmarking
and Yardstick Analyses
Conducting A Price Review
Concluding Observations
Related FAQs
Annotated Reading List
You're in the section: Price Level Regulation -> Incentive Features and Other Properties
The opportunity to keep additional profits is the incentive feature employed in the basic forms of regulation. This
raises two challenges. For the regulator of a state-owned operator, the prospects of additional profit may not be
an incentive for improved performance. This means that the regulator must identify other rewards that the
operator finds attractive and design an incentive scheme around those rewards. Also, whether the regulator
uses profit or some other incentive, the regulator must determine how much reward is needed to induce the
operator to improve performance and to know whether the additional efficiency gained is worth the additional
reward allowed. Smaller incentives are needed for easy efficiency gains than for more difficult efficiency gains.
To simplify the exposition, throughout the remainder of this section, incentive regulation will be described as if
the reward were profit. Regulators using other rewards should note that they will need to adjust the incentive
mechanisms according to the reward(s) they will use.
Regulators use two approaches to allowing operators additional profits or losses. One approach is simply to
commit1 that the operator can keep at least some portion of its earnings that are above the cost of capital. In
the case of pure price cap regulation,2 the operator is allowed to keep all of these earnings, but the operator is
also required to bear all of the cost of having earnings below the cost of capital. This is called a high-powered
incentive scheme. With earnings sharing, the operator keeps or bears something less than 100 percent of the
difference between the actual earnings and the cost of capital. Schemes under which the operator keeps only a
small percent are called low-powered incentive schemes.
The other approach that regulators use to allow operators to keep additional profits or losses is to allow the
operator to keep the difference between its earnings and its cost of capital for some period of time before
adjusting overall price levels. This is called regulatory lag. Rate of return regulation typically incorporates
regulatory lag by using historical test years, which is a system by which price levels following the price review
(or rate case) are based on costs incurred in a previous year. U.K. regulators also use regulatory lag in their
RPI-X schemes when they wait until a scheduled price review before establishing glide paths to adjust price
levels that align actual earnings with the cost of capital. A glide path is a transition period for such price
changes.
A mechanism that regulators may inadvertently use to allow operators to keep additional profits or losses is to
misestimate the cost of capital. If the allowed rate of return, which is the regulator’s estimate of the cost of
capital, is greater than the actual cost of capital, then the operator has an incentive to increase returns to
shareholders by increasing its investments. This is called the Averch-Johnson effect, or gold plating or padding
the rate base, and is a common criticism of rate of return regulation. If the regulator errors in the opposite
direction, the operator has an incentive to under invest.3
Allowing the operator to keep additional profits or losses has the additional effect of shifting risk from customers
to shareholders.4 If the operator’s earnings are constantly kept in line with its cost of capital, then profits are
Incentive Features and Other Properties Sections
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stable, but the prices that customers pay change to match changes in the business. In this scenario, customers
are bearing at least some portion of the business risk. In the other extreme, such as pure price cap regulation,
shareholders must bear all of the fluctuations in earnings, so they bear most of the risk. In general, it is
preferred that shareholders bear risk rather than customers because shareholders are generally in a better
position than customers to diversify their risk by creating diversified investment portfolios. Furthermore,
regulators sometimes use glide paths, which phase in price changes over time, to soften price impacts on
customers or to distribute risk between customers and investors.
If the regulator is using both competition and incentive regulation to overcome information and objective
asymmetries,5 and if the incentive regulation includes elements of rate of return regulation, then the operator
has a mechanism to shift costs from its non-regulated operations to its regulated operations. This has the effects
of increasing total profit and possibly giving the operator a greater market share in the competitive market and
decreasing risk. Regulators attempt to control for this by employing sophisticated accounting separation
techniques, as described in Ring Fencing and Control of Cross Subsidization in Financial Analysis.
1. Foundations of Regulation includes discussion of the difficulty governments have with keeping
commitments.
2. See Price Regulation.
3. See Principles.
4. Both NPV Concepts – Project Analysis and Risk Adjustments and Determination of Cost of Capital
examine risk.
5. See Foundations of Regulation for a discussion of the basic approaches for overcoming information
asymmetries.
Footnotes
Features of Price Cap and Revenue Cap Regulation
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Basic Forms of Regulation
Incentive Features and Other
Properties
Features of Price Cap and
Revenue Cap Regulation
Earnings Sharing
Issues In Regulating the Price
Level
Properties of Benchmarking
and Yardstick Analyses
Conducting A Price Review
Concluding Observations
Related FAQs
Annotated Reading List
You're in the section: Price Level Regulation -> Features of Price Cap and Revenue Cap Regulation
Price cap regulation1 adjusts the operator’s prices according to the price cap index that reflects the overall rate
of inflation in the economy, the ability of the operator to gain efficiencies relative to the average firm in the
economy, and the inflation in the operator’s input prices relative to the average firm in the economy.2 Revenue
cap regulation attempts to do the same thing, but for revenue rather than prices. The underlying theory is as
follows.
Consider how the price (or revenue, in the case of revenue caps) level for the average firm in a competitive
market changes relative to inflation. Inflation reflects two things, namely, the change in the value of the
country’s money and the change in the productivity of the firms in the economy. By definition, the input prices
for the average firm in the economy change at the rate of inflation and its productivity changes at the average
rate for the economy. As a result, the average firm’s retail prices change at the rate of inflation and the firm
continues to receive earnings that are equal to its cost of capital.
Now consider how a utility operator might be different from the average firm in the economy. First, assume that
the operator is just like the average firm, except that the operator’s input prices change at a rate that is different
from the rate of change for the average firm. If the operator’s input prices increase faster than (conversely,
slower than) the rate of inflation, then the operator’s retail prices (revenue) will need to increase faster than
(conversely, slower than) the rate of inflation for the operator to be able to have earnings that are at least as
great as the operator’s cost of capital.
Now assume that the operator is just like the average firm, except with respect to the operator’s ability to
improve efficiency. If the operator increases its productivity faster than (conversely, slower than) the average
firm, then the operator’s retail prices (revenue) will need to decrease (conversely, increase) relative to the rate
of inflation.
Combining these two possible differences between the operator and the average firm in the economy, the
operator’s retail prices (revenue) should change at the rate of inflation, minus (conversely, plus) the extent to
which its input prices inflate less than (conversely, greater than) the rate of inflation, and minus (conversely,
plus) the extent to which the operator’s productivity is expected to improve at a rate that is greater than
(conversely, less than) the average firm in the economy.
The above analysis identifies two things. First, the inflation rate I used in the price cap index represents the
general rate of inflation for the economy. Second, the X-factor is intended to capture the difference between the
operator and the average firm in the economy with respect to inflation in input prices and changes in
productivity. That is to say, the choice of inflation index and of the X-factor go hand in hand. Some regulators
choose a general measure of inflation, such as a gross national product price index. In this case, the X-factor
reflects the difference between the operator and the average firm in the economy with respect to the operator’s
ability to improve its productivity and the effect of inflation on the operator’s input costs. Other regulators choose
Features of Price Cap and Revenue Cap Regulation Sections
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a retail (or producer) price index. In these cases, the X-factor represents the difference between the operator
and the average retail (or wholesale) firm. Lastly, some regulators construct price indices of operator inputs. In
these cases, the X-factor reflects productivity changes of the operator.
The regulator typically constructs service baskets with an eye towards 1) allowing the operator to realign prices
within the basket, and 2) restricting the operator’s ability to realign prices between baskets.3 When the operator
is allowed to realign prices, the operator will generally change prices in accordance with their price elasticities of
demand.4 That is to say that prices for products whose price elasticity of demand is more inelastic will rise
relative to the prices for products whose price elasticity of demand is more elastic. This improves economic
efficiency, but may be contrary to certain regulatory goals, such as protecting poor customers or customers in
the least competitive markets. Sometimes the regulator limit’s the operator’s ability to realign prices within a
basket by placing restrictions on individual price changes, such as a maximum percentage by which a price
may increase in a given year.
1. See Price Regulation and Revenue Caps.
2. Only in pure price cap regulation do regulators explicitly compare the operator to the average firm in the
economy. However, all price cap schemes effectively follow this logic by adopting a price cap index based
on inflation and a productivity offset.
3. Rate design is discussed in Tariff Design.
4. Elasticity of demand refers to the extent to which customers change the quantities they purchase in
response to a change in price. If demand is inelastic, then customers’ percentage change in the quantities
they purchase is smaller in absolute terms than the percentage change in price. If the opposite is true, then
demand is said to be elastic.
Footnotes
Earnings Sharing
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Basic Forms of Regulation
Incentive Features and Other
Properties
Features of Price Cap and
Revenue Cap Regulation
Earnings Sharing
Issues In Regulating the Price
Level
Properties of Benchmarking
and Yardstick Analyses
Conducting A Price Review
Concluding Observations
Related FAQs
Annotated Reading List
You're in the section: Price Level Regulation -> Earnings Sharing
Earnings sharing is a popular form of hybrid regulation. With earnings sharing, the regulator allows the operator
to keep some portion of the earnings it receives from the market and requires the operator to give the rest to
customers, perhaps through price reductions, refunds, or increased investment. A typical earnings sharing
mechanism might work as follows. The regulator establishes a price level that equates the rate of return r that
the operator receives from the market with the operator’s cost of capital k.1 The regulator also establishes a
range with endpoints above and below the cost of capital, say from rl to rh, within which the operator retains all
of the earnings it receives from the market place, i.e., no earnings between k and rh are given to customers
through a price decrease or other mechanism, and the operator is not compensated for earnings between rl
and k. Below rl and above rh, the regulator establishes another range, say between rL and rH. For earnings
between rL and rl, customers bear some of the difference between the rL and rl, and for earnings between rh
and rH, the operator shares some of its earnings with customers. Customers bear the entire burden and receive
all of the benefits for earnings below rL and above rH.
1. See Determination of Cost of Capital regarding estimating the cost of capital.
Earnings Sharing
Footnotes
Sections
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Properties of Benchmarking and Yardstick Analyses
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Basic Forms of Regulation
Incentive Features and Other
Properties
Features of Price Cap and
Revenue Cap Regulation
Earnings Sharing
Issues In Regulating the Price
Level
Properties of Benchmarking
and Yardstick Analyses
Conducting A Price Review
Concluding Observations
Related FAQs
Annotated Reading List
You're in the section: Price Level Regulation -> Properties of Benchmarking and Yardstick Analyses
Benchmarking1 quantifies the relative historical performance of organizations or divisions, controlling for external
conditions. Once the purposes and uses of benchmarking are know, the first step is to survey
the information this is available. Such information might include system operations, network capacity, financial
flows, and outputs. Then with purposes and possibilities in mind, the regulator can choose the metrics to use
in benchmarking and how they will be used to provide incentives for improved performance.
In general there are five types of metrics that can be used for benchmarking. It is important to understand the
strengths and limitations of different methodologies so that they are used appropriately. Poorly
performed, benchmarking may hinder good performance rather than promote it.2
One type of metric – Core Overall Performance Indicators – include measures that are generally available and
simple to understand, such as output per employee, number of complaints, system loss, coverage, and key
financial indicators. These indicators help regulators identify trends, but it is difficult to account for the
relationships among the different factors. Regulators can use another type of metric, Performance Scores based
on Production or Cost Estimates, to identify the best and weakest performers in a group of service providers.
This approach can use sophisticated quantitative techniques to determine relationships between the results
being measured (such as cost per unit) and the factors beyond the operators’ control that can affect the results
(for example, population density). Data availability can make these types of analyses complex, as can the
difficulty of fully accounting for differences between operators than are beyond the operators’ control.
A third type of metric – the model or virtual company approach – is sometimes used to establish a baseline for
measuring operator performance. This method creates an optimized economic and engineering model of a
company. The methods are complex and can be controversial because it is difficult to ground in reality the
numerous assumptions that must be made in constructing the models. Process Benchmarking is the fourth
approach and focuses on individual production processes, such as pumping, transport, and treatment in the
provision of water. This approach provides regulators with detailed information on specific stages of production,
but they can be problematic in a regulatory incentive scheme because they focus on management issues of
how services are provided rather than the outcome issues of the costs and quality that customers experience.
Generally management decisions should be left to the operator since it is the operator that is take on
the risks of good or poor management decisions.
Customer Survey Benchmarking is the last form of benchmarking and focuses
on customer perceptions. Customer perceptions can be measured through surveys, focus
groups, complaint monitoring, and the like. This approach has the advantage of directly gauging
the customer’s experience, but customers’ views can be influenced by attitudes and experiences that are
beyond the operators’ control.
Properties of Benchmarking and Yardstick Analyses Sections
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RegulatoryProcess
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Properties of Benchmarking and Yardstick Analyses
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1. To ease the exposition, the term benchmarking will be used in this portion of the narrative.
2. It is beyond the scope of this narrative to explore the strengths and weaknesses of each metric. See the
references in this chapter for information on the properties of each metric.
Footnotes
Conducting A Price Review
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Basic Forms of Regulation
Incentive Features and Other
Properties
Features of Price Cap and
Revenue Cap Regulation
Earnings Sharing
Issues In Regulating the Price
Level
Properties of Benchmarking
and Yardstick Analyses
Conducting A Price Review
Concluding Observations
Related FAQs
Annotated Reading List
You're in the section: Price Level Regulation -> Conducting A Price Review
A price review consists of four basic procedures, namely: decide what to regulate, evaluate the existing price
control scheme, choose how prices will be controlled going forward, and implement the new control.1 The first of
these steps applies primarily to telecommunications, where competition serves as an effective regulator in many
instances. The section on Market Structure and Competition and Tariff Design focuses on how to assess the
competitiveness of a market.
There are several approaches to completing the last three procedures. The general practice in the U.K. is a
two-year process that begins with gathering and analyzing information on costs,2 investment plans, and demand
forecasts; forecasting revenue requirements;3 choosing whether to use price caps or revenue caps;4 projecting
revenue and cash flows using different price control parameters; and making the announcement.5 Time is
allowed at the end of the process to complete appeals6 before the old price control scheme expires. In the U.S.,
resetting the X-factor in price cap regulation has involved extensive productivity studies and other information
gathering.7 Developing countries often use a combination of the U.K. and U.S. approaches, depending on
institutional capabilities and available information.
Most price review processes include multiple opportunities for receiving stakeholder and informing stakeholders
of decisions.8 For example, Ofwat in the U.K. has followed a procedure that receives stakeholder input in the
planning stages, data gathering stages, modeling stage, data analysis stage, and conclusion stage. The
regulator issues numerous preliminary conclusions, explains the reasons for those conclusions, and asks for
comments.
With most forms of price control, the regulator fixes the time between price reviews. Typical time periods are
four and five years. The length of time depends on the confidence the regulator has in his price control
parameters, the stability of the economy and industry, and the desired power of the incentive scheme. Setting
the duration of the price controls involves a trade-off between the efficiency incentives and the need to keep the
overall price level in line with the overall cost level, but in general, high confidence, a stable economy, and high
power indicate long times between price reviews. Low confidence, unstable economy, and low power imply
short times. Agency and operator resources must also be considered. With other forms of price control, such as
rate of return regulation as practiced by the states in the U.S., high or low earnings relative to the cost of capital
trigger price reviews, which are called rate cases. The regulator generally relies on the operator or a consumer
representative to raise the issue of whether earnings are out of line with the cost of capital. If that happens,
then the regulator conducts a rate case.
1. See Principles. The references in Principles provide other ways of dividing the work of a price review into
Conducting A Price Review
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multiple steps.
2. See Financial Analysis for information on obtaining, managing, and using financial information.
3. See Demand Forecasting for information on demand forecasting.
4. See Principles for information on choosing the form of regulation.
5. See Stakeholder Relations for information on strategies for dealing with the press and communicating
with the public.
6. See Development, Review, and Appeal of Regulatory Rules and Decisions for information on appeal
processes of regulatory decisions.
7. See Price Regulation.
8. See Institutional Design Issues and Stakeholder Relations for approaches to involving stakeholders in
regulatory processes.
Concluding Observations
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Basic Forms of Regulation
Incentive Features and Other
Properties
Features of Price Cap and
Revenue Cap Regulation
Earnings Sharing
Issues In Regulating the Price
Level
Properties of Benchmarking
and Yardstick Analyses
Conducting A Price Review
Concluding Observations
Related FAQs
Annotated Reading List
You're in the section: Price Level Regulation -> Concluding Observations
As indicated above, most regulators use a hybrid scheme to regulate overall prices. The appropriate
combination of rate of return tools, price or revenue caps, benchmarking, and length of time between price
reviews depends on a country’s goals, institutional strength, level of competition, and economic stability to name
a few. In fact, in some instances the regulator gives the operator a menu of options from which the operator can
choose its hybrid scheme. These options generally include tradeoffs between price decreases and profits such
that if the operator chooses an option that has aggressive price decreases, the operator is allowed to keep all
or a significant portion of whatever earnings it receives from the marketplace. Conversely, if the operator
chooses an option that has conservative price decreases, then the operator has to give back all or a significant
portion of its earnings if they exceed the operator’s cost of capital.
Of the general approaches to regulating overall price levels, rate of return regulation generally provides flexibility
in addressing changes in costs and earnings. Price and revenue cap regulation provide the greatest pricing
flexibility for the operator. Furthermore, rate of return regulation provides the greatest predictability of earnings,
if the regulatory environment is considered to be predictable. Price and revenue regulation provide the greatest
predictability for overall price levels.
Regardless of the form of regulation, the regulator is better off knowing more about the industry than less. The
next section examines issues in obtaining and managing information.
Concluding Observations Sections
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MarketStructure andCompetition
FinancialAnalysis
Price LevelRegulation
Tariff Design Quality,Social,EnvironmentalIssues
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Related FAQs
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Basic Forms of Regulation
Incentive Features and Other
Properties
Features of Price Cap and
Revenue Cap Regulation
Earnings Sharing
Issues In Regulating the Price
Level
Properties of Benchmarking
and Yardstick Analyses
Conducting A Price Review
Concluding Observations
Related FAQs
Annotated Reading List
Do higher income customers benefit more from subsidies than do poorer customers?
How can a regulator promote investment while keeping service prices affordable?
In an industry where an aging network and generation capacity constraints lead to poor service delivery, to
what extent should consumers contribute towards capital expansion?
Since rates in the water sector seldom reflect full cost recovery, how can you convince citizens to accept
higher prices (given their willingness to pay)?
Incentive Regulation: What are strategies for regulating state-owned enterprises with their unique
information issues and strong links to government ministries?
Related FAQs Sections
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FinancialAnalysis
Price LevelRegulation
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