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Implementing incentive regulation through an alignment with resource bounded regulators

  • Jean-Michel Glachant

    (ADIS - Analyse des Dynamiques Industrielles et Sociales - Département d'Economie - Université Paris XI - Paris Sud)

  • Haikel Khalfallah

    ()

    (PACTE - Politiques publiques, ACtion politique, TErritoires - Institut d'Études Politiques [IEP] - Grenoble - CNRS : UMR5194 - Université Pierre-Mendès-France - Grenoble II - Université Joseph Fourier - Grenoble I)

  • Yannick Perez

    (LdP - Loyola de Palacio Programme - European University Institute)

  • Vincent Rious

    (E3S - Supélec Sciences des Systèmes - EA4454 - SUPELEC)

  • Marcelo Saguan

    (Chercheur Indépendant - Aucune)

It is puzzling today to explain both the diversity and the rationale of regulators' practice vis-à-vis network monopolies. We argue that two fundamental characteristics should be considered when defining the most appropriate regulatory tools. First, it is the bounded endowment of regulators set by governments and legislators which determines their abilities (staff, budget, administrative powers) to implement any of the regulatory tools. Ranked from the easiest to the most demanding to implement, these various tools are: a- cost plus, b- price/revenue cap, c- output or performance-based regulation, d- menu of contracts and e- yardstick competition. Second, the regulators also have to take into account that the network monopolies perform multiple tasks with heterogeneous regulatory characteristics (in terms of controllability, ex ante predictability and ex post observability). These characteristics of tasks determine what type of regulatory tool is more likely to better regulate each task. The regulatory tools then perform well only when they are implemented for tasks that are controllable and predictable enough. It is the kind of observability of these tasks which determines the best incentive tool to implement. Lastly, conclusions for the regulation of networks are derived. A workable regulation of network relies on a reasonable alignment of the regulatory tools with the regulatory characteristics of tasks and the regulators resource endowment.

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Paper provided by HAL in its series Post-Print with number halshs-00767872.

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Date of creation: 2013
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Publication status: Published, Competition and Regulation in Network Industries, 2013, 14, 3, 265-291
Handle: RePEc:hal:journl:halshs-00767872
Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00767872
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  9. Brophy Haney, A. & Pollitt, M.G., 2010. "Exploring the Determinants of ‘Best Practice’ in Network Regulation: The Case of the Electricity Sector," Cambridge Working Papers in Economics 1020, Faculty of Economics, University of Cambridge.
  10. Evans, Lewis & Guthrie, Graeme, 2006. "Incentive Regulation of Prices when Costs are Sunk," Working Paper Series 3875, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
  11. Jean-Michel Glachant, 2010. "The Achievement of the EU Electricity Internal Market through Market Coupling," RSCAS Working Papers 2010/87, European University Institute.
  12. Leonardo Meeus & Marcelo Saguan & Jean-Michel Glachant & Ronnie Belmans, 2010. "Smart Regulation for Smart Grids," RSCAS Working Papers 2010/45, European University Institute.
  13. Luis Olmos & Sophia Ruester & Siok Jen Liong & Jean-Michel Glachant, 2010. "Public Support for the Financing of RD&D Activities in New Clean Energy Technologies," RSCAS Working Papers 2010/69, European University Institute.
  14. Rious Vincent & Perez Yannick & Glachant Jean-Michel, 2011. "Power Transmission Network Investment as an Anticipation Problem," Review of Network Economics, De Gruyter, vol. 10(4), pages 1-23, December.
  15. Brophy Haney, A. & Pollitt, M.G., 2009. "Efficiency Analysis of Energy Networks : An International Survey of Regulators," Cambridge Working Papers in Economics 0926, Faculty of Economics, University of Cambridge.
  16. Joskow Paul L., 2008. "Incentive Regulation and Its Application to Electricity Networks," Review of Network Economics, De Gruyter, vol. 7(4), pages 1-14, December.
  17. Andrei Shleifer, 1985. "A Theory of Yardstick Competition," RAND Journal of Economics, The RAND Corporation, vol. 16(3), pages 319-327, Autumn.
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