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Optimal sliding scale regulation: an application to regional electricity distribution in England and Wales

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  • David Hawdon
  • Lester C. Hunt
  • Paul Levine
  • Neil Rickman

Abstract

This paper examines optimal price (i.e. 'sliding scale') regulation of a monopoly when productivity and managerial effort are not observed. We show generally how to operationalize this model of incentive regulation and use actual data from electricity distribution in England and Wales to estimate key parameters and make welfare comparisons of sliding scale regulation with a stylized price cap regime and the First-Best (the full information case). Our method enables us to quantify technical uncertainty as faced by the electricity regulator in the 1990s and shows that there are significant welfare gains from a sliding scale relative to the stylized price cap regime. Copyright 2007 , Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 59 (2007)
Issue (Month): 3 (July)
Pages: 458-485

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Handle: RePEc:oup:oxecpp:v:59:y:2007:i:3:p:458-485

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  1. Wilson, Robert, 1997. "Nonlinear Pricing," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780195115826, October.
  2. Bernstein, Jeffrey I. & Sappington, David E. M., 2000. "How to determine the X in RPI-X regulation: a user's guide," Telecommunications Policy, Elsevier, Elsevier, vol. 24(1), pages 63-68, February.
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  6. Green, Richard & McDaniel, Tanga, 1998. "Competition in Electricity Supply: Will '1998' be Worth it?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1814, C.E.P.R. Discussion Papers.
  7. Auriol, Emmanuelle & Laffont, Jean-Jacques, 1992. "Regulation by Duopoly," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 1(3), pages 507-33, Fall.
  8. Colin Mayer & John Vickers, 1996. "Profit-sharing regulation: an economic appraisal," Fiscal Studies, Institute for Fiscal Studies, Institute for Fiscal Studies, vol. 17(1), pages 1-18, February.
  9. Jeffrey I. Bernstein & David E. M. Sappington, 1998. "Setting the X Factor in Price Cap Regulation Plans," NBER Working Papers 6622, National Bureau of Economic Research, Inc.
  10. Gasmi, F & Ivaldi, M & Laffont, Jean Jacques, 1994. "Rent Extraction and Incentives for Efficiency in Recent Regulatory Proposals," Journal of Regulatory Economics, Springer, Springer, vol. 6(2), pages 151-76, May.
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  13. Catherine D. Wolfram, 1999. "Measuring Duopoly Power in the British Electricity Spot Market," American Economic Review, American Economic Association, American Economic Association, vol. 89(4), pages 805-826, September.
  14. Newbery, David M & Pollitt, Michael G, 1997. "The Restructuring and Privatization of Britain's CEGB--Was It Worth It?," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 45(3), pages 269-303, September.
  15. Gasmi, F & Laffont, Jean-Jacques & Sharkey, W W, 1997. "Incentive Regulation and the Cost Structure of the Local Telephone Exchange Network," Journal of Regulatory Economics, Springer, Springer, vol. 12(1), pages 5-25, July.
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Cited by:
  1. J.A. den Hertog, 2010. "Review of economic theories of regulation," Working Papers, Utrecht School of Economics 10-18, Utrecht School of Economics.
  2. Marisa Miraldo & Luigi Siciliani & Andrew Street, 2008. "Price Adjustment in the Hospital Sector," Working Papers, Centre for Health Economics, University of York 041cherp, Centre for Health Economics, University of York.
  3. Francesca Stroffolini, 2009. "Access Profit-Sharing Regulation with Information Transmission and Acquisition," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 214, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  4. Stroffolini, Francesca, 2012. "Access profit-sharing regulation with information acquisition and transmission," Research in Economics, Elsevier, Elsevier, vol. 66(2), pages 161-174.

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