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Economic Regulation and Its ReformWhat Have We Learned?$
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Nancy L. Rose

Print publication date: 2014

Print ISBN-13: 9780226138022

Published to Chicago Scholarship Online: January 2015

DOI: 10.7208/chicago/9780226138169.001.0001

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Incentive Regulationin Theory and PracticeElectricity Distribution and Transmission Networks

Incentive Regulationin Theory and PracticeElectricity Distribution and Transmission Networks

Chapter:
(p.291) 5 Incentive Regulationin Theory and PracticeElectricity Distribution and Transmission Networks
Source:
Economic Regulation and Its Reform
Author(s):

Nancy L. Rose

Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226138169.003.0006

Public utility network industries historically evolved as either state-owned or private regulated vertically integrated monopolies. Many countries have privatized and restructured these sectors. Reforms typically involve the vertical separation of potentially competitive segments, which are gradually deregulated, from remaining network segments, which are assumed to have natural monopoly characteristics and remain subject to price, network access, service quality, and entry regulations. Reforms frequently include the introduction of “incentive regulation” mechanisms for the remaining regulated segments, as opposed to traditional “cost of service” or “rate of return” regulation. Although significant research has focused on the performance of potentially competitive segments that have been deregulated, the performance of new incentive regulation mechanisms in the segments subject to ongoing regulation is economically important. This chapter reviews the theoretical and conceptual foundations of incentive regulation theory, discusses practical implementation issues, and examines how incentive regulation mechanisms have been structured and applied. Its implementation in United Kingdom electric distribution and transmission networks, where the application of these mechanisms is most advanced, is examined. The implementation of incentive regulation concepts is more complex than it seems and has implications for regulatory resources devoted to information collection, monitoring, and dynamic regulatory adjustments.

Keywords:   network industries, incentive regulation, economic regulation, deregulation, restructuring, electric power, price cap regulation

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