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Implementing Incentive Regulation and Regulatory Alignment with Resource Bounded Regulators


  • Jean-Michel Glachant, Haikel Khalfallah, Yannick Perez, Vincent Rious and Marcelo Saguan


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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  • Jean-Michel Glachant, Haikel Khalfallah, Yannick Perez, Vincent Rious and Marcelo Saguan, 2012. "Implementing Incentive Regulation and Regulatory Alignment with Resource Bounded Regulators," RSCAS Working Papers 2012/31, European University Institute.
  • Handle: RePEc:rsc:rsceui:2012/31

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    References listed on IDEAS

    1. Haney, Aoife Brophy & Pollitt, Michael G., 2009. "Efficiency analysis of energy networks: An international survey of regulators," Energy Policy, Elsevier, vol. 37(12), pages 5814-5830, December.
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    5. Leonardo Meeus & Marcelo Saguan & Jean-Michel Glachant & Ronnie Belmans, 2010. "Smart Regulation for Smart Grids," RSCAS Working Papers 2010/45, European University Institute.
    6. Lewis Evans & Graeme Guthrie, 2006. "Incentive Regulation of Prices When Costs are Sunk," Journal of Regulatory Economics, Springer, vol. 29(3), pages 239-264, May.
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    8. Jean-Michel Glachant & Yannick Perez, 2009. "The Achievement of Electricity Competitive Reforms: A Governance Structure Problem?," Chapters,in: Regulation, Deregulation, Reregulation, chapter 9 Edward Elgar Publishing.
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    13. Jean-Michel Glachant, 2010. "The Achievement of the EU Electricity Internal Market through Market Coupling," RSCAS Working Papers 2010/87, European University Institute.
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    Cited by:

    1. Lo Schiavo, Luca & Delfanti, Maurizio & Fumagalli, Elena & Olivieri, Valeria, 2013. "Changing the regulation for regulating the change: Innovation-driven regulatory developments for smart grids, smart metering and e-mobility in Italy," Energy Policy, Elsevier, vol. 57(C), pages 506-517.
    2. Cambini, Carlo & Croce, Annalisa & Fumagalli, Elena, 2014. "Output-based incentive regulation in electricity distribution: Evidence from Italy," Energy Economics, Elsevier, vol. 45(C), pages 205-216.
    3. Ahrend, Klaus-Michael & Meyer-Renschhausen, Martin, 2014. "Bewertung von Strom- und Gasnetzen mit Ertragswert und Realoptionen," EconStor Preprints 106943, ZBW - German National Library of Economics.
    4. Henriot, Arthur, 2013. "Financing investment in the European electricity transmission network: Consequences on long-term sustainability of the TSOs financial structure," Energy Policy, Elsevier, vol. 62(C), pages 821-829.


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