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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.

Suggested Citation

  • David Hawdon & Lester C. Hunt & Paul Levine & Neil Rickman, 2007. "Optimal sliding scale regulation: an application to regional electricity distribution in England and Wales," Oxford Economic Papers, Oxford University Press, vol. 59(3), pages 458-485, July.
    • Handle: RePEc:oup:oxecpp:v:59:y:2007:i:3:p:458-485
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    2. Ovaere, Marten, 2023. "Cost-efficiency and quality regulation of energy network utilities," Energy Economics, Elsevier, vol. 120(C).
    3. Francesca Stroffolini, 2009. "Access Profit-Sharing Regulation with Information Transmission and Acquisition," CSEF Working Papers 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, vol. 66(2), pages 161-174.
    5. J.A. den Hertog, 2010. "Review of economic theories of regulation," Working Papers 10-18, Utrecht School of Economics.

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    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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