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

Author

Listed:
  • 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.

Suggested Citation

  • David Hawdon & Lester C Hunt & Paul Levine & Neil Rickman, 2005. "Optimal sliding scale regulation: An application to regional electricity distribution in England and Wales," Surrey Energy Economics Centre (SEEC), School of Economics Discussion Papers (SEEDS) 111, Surrey Energy Economics Centre (SEEC), School of Economics, University of Surrey.
  • Handle: RePEc:sur:seedps:111
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    File URL: http://www.seec.surrey.ac.uk/Research/SEEDS/SEEDS111.pdf
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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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    6. Auriol, Emmanuelle & Laffont, Jean-Jacques, 1992. "Regulation by Duopoly," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(3), pages 507-533, Fall.
    7. 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 151-176, May.
    8. Ian M. Dobbs, 2004. "Intertemporal price cap regulation under uncertainty," Economic Journal, Royal Economic Society, vol. 114(495), pages 421-440, April.
    9. Colin Mayer & John Vickers, 1996. "Profit-sharing regulation: an economic appraisal," Fiscal Studies, Institute for Fiscal Studies, vol. 17(1), pages 1-18, February.
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    11. Green, Richard, 1999. "The Electricity Contract Market in England and Wales," Journal of Industrial Economics, Wiley Blackwell, vol. 47(1), pages 107-124, March.
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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.|info:eu-repo/dai/nl/21319161X den Hertog, 2010. "Review of economic theories of regulation," Working Papers 10-18, Utrecht School of Economics.

    More about this item

    Keywords

    Sliding scale; regulation; electricity distribution;

    JEL classification:

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

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