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

Author

Listed:
  • Hawdon, David
  • Hunt, Lester
  • Levine, Paul L
  • Rickman, Neil

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.

Suggested Citation

  • Hawdon, David & Hunt, Lester & Levine, Paul L & Rickman, Neil, 2005. "Optimal Sliding Scale Regulation: An Application to Regional Electricity Distribution in England and Wales," CEPR Discussion Papers 4934, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4934
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    References listed on IDEAS

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    1. Jamasb, Tooraj & Nillesen, Paul & Pollitt, Michael, 2004. "Strategic behaviour under regulatory benchmarking," Energy Economics, Elsevier, vol. 26(5), pages 825-843, September.
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    3. Ian M. Dobbs, 2004. "Intertemporal price cap regulation under uncertainty," Economic Journal, Royal Economic Society, vol. 114(495), pages 421-440, April.
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    5. Richard Green & Tanga McDaniel, 1998. "Competition in electricity supply: will ‘1998’ Be worth it?," Fiscal Studies, Institute for Fiscal Studies, vol. 19(3), pages 273-293, August.
    6. Green, Richard, 1999. "The Electricity Contract Market in England and Wales," Journal of Industrial Economics, Wiley Blackwell, vol. 47(1), pages 107-124, March.
    7. 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.
    8. Auriol, Emmanuelle & Laffont, Jean-Jacques, 1992. "Regulation by Duopoly," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(3), pages 507-533, Fall.
    9. 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 133-157, May.
    10. 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.
    11. 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.
    12. 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.
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    Citations

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    Cited by:

    1. Miraldo, Marisa & Siciliani, Luigi & Street, Andrew, 2011. "Price adjustment in the hospital sector," Journal of Health Economics, Elsevier, vol. 30(1), pages 112-125, January.
    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.

    More about this item

    Keywords

    electricity distribution; regulation; sliding scale;

    JEL classification:

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

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