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

  • 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)

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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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
Contact details of provider: Postal: Guildford, Surrey GU2 5XH, UK
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  1. 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.
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  3. 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.
  4. 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.
  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, 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 151-76, May.
  7. 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.
  8. 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.
  9. 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, June.
  10. Wilson, Robert, 1997. "Nonlinear Pricing," OUP Catalogue, Oxford University Press, number 9780195115826, July.
  11. 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.
  12. Auriol, Emmanuelle & Laffont, Jean-Jacques, 1992. "Regulation by Duopoly," IDEI Working Papers 20, Institut d'Économie Industrielle (IDEI), Toulouse.
  13. Jamasb, Tooraj & Nillesen, Paul & Pollitt, Michael, 2004. "Strategic behaviour under regulatory benchmarking," Energy Economics, Elsevier, vol. 26(5), pages 825-843, September.
  14. Green, Richard, 1999. "The Electricity Contract Market in England and Wales," Journal of Industrial Economics, Wiley Blackwell, vol. 47(1), pages 107-24, March.
  15. Colin Mayer & John Vickers, 1996. "Profit-sharing regulation: an economic appraisal," Fiscal Studies, Institute for Fiscal Studies, vol. 17(1), pages 1-18, February.
  16. Ian M. Dobbs, 2004. "Intertemporal price cap regulation under uncertainty," Economic Journal, Royal Economic Society, vol. 114(495), pages 421-440, 04.
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