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

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Author Info

  • David Hawdon

    (Surrey Energy Economics Centre (SEEC), Department of Economics, University of Surrey)

  • Lester C. Hunt

    ()
    (Surrey Energy Economics Centre (SEEC), Department of Economics, University of Surrey)

  • Paul Levine

    ()
    (Surrey Energy Economics Centre (SEEC), Department of Economics, University of Surrey)

  • Neil Rickman

    ()
    (Surrey Energy Economics Centre (SEEC), Department of Economics, University of Surrey)

Abstract

This paper examines optimal price (i.e. ‘sliding scale’) regulation of a monopoly when productivity and managerial effort are not observed. We show how to operationalise 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 stylised 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 stylised price cap regime.

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Bibliographic Info

Paper provided by Surrey Energy Economics Centre (SEEC), School of Economics, University of Surrey in its series Surrey Energy Economics Centre (SEEC), School of Economics Discussion Papers (SEEDS) with number 111.

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Length: 48 pages
Date of creation: Nov 2005
Date of revision:
Publication status: Published in Oxford Economic Papers, 59(3), 2007, pp. 458-485. (Revised Version)
Handle: RePEc:sur:seedps:111

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Keywords: Sliding scale; regulation; electricity distribution;

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References

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  1. Auriol, Emmanuelle & Laffont, Jean-Jacques, 1992. "Regulation by Duopoly," IDEI Working Papers 20, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. 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.
  3. Armstrong, M. & Cowan, S. & Vickers, J., 1992. "Nonlinear Pricing and Price Cap Regulation," Economics Series Working Papers 99152, University of Oxford, Department of Economics.
  4. Jamasb, Tooraj & Nillesen, Paul & Pollitt, Michael, 2004. "Strategic behaviour under regulatory benchmarking," Energy Economics, Elsevier, vol. 26(5), pages 825-843, September.
  5. Bernstein, Jeffrey I. & Sappington, David E. M., 2000. "How to determine the X in RPI-X regulation: a user's guide," Telecommunications Policy, Elsevier, vol. 24(1), pages 63-68, February.
  6. Gasmi, Farid & Ivaldi, Marc & Laffont, Jean-Jacques, 1992. "Rent Extraction and Incentives for Efficiency in Recent Regulatory Proposals," IDEI Working Papers 21, Institut d'Économie Industrielle (IDEI), Toulouse.
  7. Ian M. Dobbs, 2004. "Intertemporal price cap regulation under uncertainty," Economic Journal, Royal Economic Society, vol. 114(495), pages 421-440, 04.
  8. Green, Richard & McDaniel, Tanga, 1998. "Competition in Electricity Supply: Will '1998' be Worth it?," CEPR Discussion Papers 1814, C.E.P.R. Discussion Papers.
  9. 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.
  10. Colin Mayer & John Vickers, 1996. "Profit-sharing regulation: an economic appraisal," Fiscal Studies, Institute for Fiscal Studies, vol. 17(1), pages 1-18, February.
  11. Wilson, Robert, 1997. "Nonlinear Pricing," OUP Catalogue, Oxford University Press, number 9780195115826.
  12. 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.
  13. Green, Richard, 1999. "The Electricity Contract Market in England and Wales," Journal of Industrial Economics, Wiley Blackwell, vol. 47(1), pages 107-24, March.
  14. 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.
  15. 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.
  16. 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, vol. 45(3), pages 269-303, September.
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Citations

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Cited by:
  1. Marisa Miraldo & Luigi Siciliani & Andrew Street, 2008. "Price Adjustment in the Hospital Sector," Working Papers 041cherp, Centre for Health Economics, University of York.
  2. Stroffolini, Francesca, 2012. "Access profit-sharing regulation with information acquisition and transmission," Research in Economics, Elsevier, vol. 66(2), pages 161-174.
  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. J.A. den Hertog, 2010. "Review of economic theories of regulation," Working Papers 10-18, Utrecht School of Economics.

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