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Optimal Sliding Scale Regulation: An Application to Regional Electricity Distribution in England and Wales

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Author Info
Hawdon, David
Hunt, Lester
Levine, Paul L
Rickman, Neil

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Abstract

This paper examines optimal price (i.e. ‘sliding scale’) regulation of a monopoly when efficiency and managerial effort are not observed. We show how to operationalize this model of incentive regulation and use actual data from electricity distribution in England and Wales to make welfare comparisons of sliding scale regulation with a 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 price cap regime.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4934.

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Date of creation: Feb 2005
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Handle: RePEc:cpr:ceprdp:4934

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Related research
Keywords: electricity distribution; regulation; sliding scale;

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Find related papers by JEL classification:
L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Catherine D. Wolfram, 1999. "Measuring Duopoly Power in the British Electricity Spot Market," American Economic Review, American Economic Association, vol. 89(4), pages 805-826, September. [Downloadable!] (restricted)
  2. Jamasb, Tooraj & Nillesen, Paul & Pollitt, Michael, 2004. "Strategic behaviour under regulatory benchmarking," Energy Economics, Elsevier, vol. 26(5), pages 825-843, September. [Downloadable!] (restricted)
  3. Richard Schmalensee, 1989. "Good Regulatory Regimes," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 417-436, Autumn. [Downloadable!] (restricted)
  4. Catherine D. Wolfram, 1998. "Strategic Bidding in a Multiunit Auction: An Empirical Analysis of Bids to Supply Electricity in England and Wales," RAND Journal of Economics, The RAND Corporation, vol. 29(4), pages 703-725, Winter. [Downloadable!] (restricted)
  5. Ian M. Dobbs, 2004. "Intertemporal price cap regulation under uncertainty," Economic Journal, Royal Economic Society, vol. 114(495), pages 421-440, 04. [Downloadable!] (restricted)
  6. Colin Mayer & John Vickers, 1996. "Profit-sharing regulation: an economic appraisal," Fiscal Studies, Institute for Fiscal Studies, vol. 17(1), pages 1-18, February. [Downloadable!]
  7. Amrstong, Mark & Cowan, Simon & Vickers, John, 1995. "Nonlinear pricing and price cap regulation," Journal of Public Economics, Elsevier, vol. 58(1), pages 33-55, September. [Downloadable!] (restricted)
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  8. Mark Armstrong & Simon Cowan & John Vickers, 1994. "Regulatory Reform: Economic Analysis and British Experience," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510790.
  9. Green, Richard & McDaniel, Tanga, 1998. "Competition in Electricity Supply: Will '1998' be Worth it?," CEPR Discussion Papers 1814, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  10. Green, Richard, 1999. "The Electricity Contract Market in England and Wales," Journal of Industrial Economics, Blackwell Publishing, vol. 47(1), pages 107-24, March. [Downloadable!] (restricted)
  11. Newbery, David M & Pollitt, Michael G, 1997. "The Restructuring and Privatization of Britain's CEGB--Was It Worth It?," Journal of Industrial Economics, Blackwell Publishing, vol. 45(3), pages 269-303, September. [Downloadable!] (restricted)
  12. Gasmi, F & Ivaldi, M & Laffont, Jean Jacques, 1994. "Rent Extraction and Incentives for Efficiency in Recent Regulatory Proposals," Journal of Regulatory Economics, Springer, vol. 6(2), pages 151-76, May.
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  13. Auriol, Emmanuelle & Laffont, Jean-Jacques, 1992. "Regulation by Duopoly," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 1(3), pages 507-33, Fall.
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  14. Burns, Philip & Turvey, Ralph & Weyman-Jones, Thomas G, 1998. "The Behaviour of the Firm under Alternative Regulatory Constraints," Scottish Journal of Political Economy, Scottish Economic Society, vol. 45(2), pages 133-57, May. [Downloadable!] (restricted)
  15. David M. Newbery, 1998. "Competition, Contracts, and Entry in the Electricity Spot Market," RAND Journal of Economics, The RAND Corporation, vol. 29(4), pages 726-749, Winter. [Downloadable!] (restricted)
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  16. Bernstein, Jeffrey I & Sappington, David E M, 1999. "Setting the X Factor in Price-Cap Regulation Plans," Journal of Regulatory Economics, Springer, vol. 16(1), pages 5-25, July. [Downloadable!] (restricted)
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  17. 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, vol. 12(1), pages 5-25, July. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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. [Downloadable!]
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