Understanding Regulation: Theory, Strategy, and Practice

By Robert Baldwin; Martin Cave | Go to book overview

17
Price-Capping Mechanisms

One of the essential features of most utilities is that, at least in respect of some of their functions, the companies providing services are not subject to full competition. Only in exceptional cases do households or firms have a choice over which company is to provide them with water and sewerage service. Everywhere there is only one pipeline system for the distribution of gas, and only one high- and low-voltage electricity transmission and distribution system. Even in cases where competition is developing, for example in telecommunications or in the retailing of electricity and gas, the market power exercised by the former monopolist allows it to set its prices to a considerable extent independently of its competitors or customers. In such circumstances, it is natural for the regulator to respond by introducing some form of price control.

We have argued in Chapter 15 above that, in the case of a privately owned utility, the price control regime must strike a balance between the interests of customers--protecting them from monopolistic eploitation-- and the interests of investors, who, when they have sunk considerable sums of money into irrecoverable investments, will be concerned lest the regulator should impose a level of charges that makes it impossible for them to recover their investments. Even the fear of this eventuality may be sufficient to deter them from making the investment in the first place. The twin functions of price regulation are thus to protect consumers from exploitation and to provide investors with the confidence to maintain the infrastructure needed to provide service.1


1. Rate of Return Regulation

There are a number of ways in which price control can be achieved. The simplest means is to impose a regime of cost-plus pricing.2 Under such

____________________
1
For a detailed analysis of solutions to this dilemma, see B. Levy and P. Spiller (eds.), Regulations, Institutions and Commitment ( Cambridge, 1996).
2
See C. Foster, Privatisation, Public Ownership and the Regulation of Natural Monopoly ( Oxford, 1992), 186-97 on the American experience of cost-plus regulation.

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Understanding Regulation: Theory, Strategy, and Practice
Table of contents

Table of contents

  • Title Page iii
  • Acknowledgements v
  • Contents vii
  • Figures ix
  • Tables x
  • Abbreviations xi
  • I- Introduction 1
  • 1- FUNDAMENTALS 7
  • 2: Why Regulate? 9
  • 3: Explaining Regulation 18
  • 4: Regulatory Strategies 34
  • 5: Who Regulates? Institutions and Structures 63
  • 6- What is 'Good' Regulation? 76
  • 7- The Cost-Benefit Testing Of Regulation 86
  • 8: Enforcing Regulation 96
  • 9: Setting Standards 118
  • 10: Self-Regulation 125
  • 11: Regulating Risks 138
  • 12: Regulation in the European Context 150
  • 13: Regulatory Competition and Coordination 180
  • 14: British Utilities Regulation 190
  • II- PARTICULAR CONCERNS 201
  • 15: Price Setting in Natural Monopolies 203
  • 16- Regulation Versus Competition 210
  • 17- Price-Capping Mechanisms 224
  • 18- Measuring Efficiency: Benchmarking, Yardsticking, and Performance 239
  • 19: Regulating Quality 248
  • 20: Franchising and its Limitations 257
  • 21: Accountability 286
  • 22: Procedures and Fairness 314
  • 23- Conclusions 334
  • Bibliography 337
  • Index 359
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