An evaluation of incentive regulation for electric utilities

This empirical study examines the determinants and impacts of incentive regulations introduced by utility commissions in the late 1970s and early 1980s. Rewards for generating plant utilization and low heat rates were found to have been introduced in states whose firms exhibited relatively high managerial slack (or relatively higher costs). However, the empirical results did not find that the introduction of specific cost component incentives improved overall operating cost performance.     

A model of incentive regulation

A method of incentive regulation is presented. The regulatory agency sets a‘fair rate of return’ which is used to determine a ‘target’ profit for the regulated firm. If the firm's actual profit differs from the target profit, it retains a fraction of the excess (or absorbs a fraction of the deficit). This feature of the system provides a strong incentive for efficient operation. Properties of the incentive system are explored and problems of implementation are briefly examined.     

Electricity wheeling and incentive regulation

This paper relates social contract regulation strategies to a particularly important comtemporary issue in energy regulation—electricity wheeling; we find that substantial gains in economic efficiency may be possible. First, social contracts give potential wheelers more monetary incentive than traditional regulatory procedures to provide wheeling services to interested third parties. Second, social contract regulation gives potential wheelers better incentives to measure marginal costs accurately. Third, under social contract regulation, wheelers have proper incentives to install efficient amounts of transmission capacity, thereby avoiding Averch-Johnson and other regulatory distortions that emerge in traditional regulation.     

Toward improved and practical incentive regulation

The first half of this paper overviews traditional methods of ratemaking—embedded and marginal cost pricing—and four recent alternatives—automatic rate adjustments, profit-sharing, tariff menus, and the Vogelsang-Finsinger convergence mechanism—that have come to challenge them. We develop a list of nine desirable properties that are suitable to gauge any regulatory mechanism. In the second half of the paper, we explore in greater detail two recent incentive plans—the FCC's price caps approach and a mechanism that the three authors proposed in a FERC document. Based on the nine properties, these two mechanisms are compared.     

The effects of incentive regulation in the telecommunications industry: A survey

We review recent empirical studies of the performance of incentive regulation in the telecommunications industry. These studies provide evidence that productivity, infrastructure investment, profit levels, telephone penetration, and new service offerings have increased under incentive regulation. Service rates have generally remained stable or decreased slightly, and service quality does not appear to have been affected adversely. There is no evidence that incentive regulation has led to streamlined regulatory proceedings. Strong evidence that incentive regulation has reduced the costs of providing telephone service has not yet materialized.We thank Sanford Berg, Alex Larson, Larry Schelhorse, and Timothy Tardiff for very helpful comments and discussion. We are also grateful to Michael Crew and Ingo Vogelsang for a particularly careful and insightful review of this paper.     

An empirical analysis of incentive regulation and the allocation of inputs in the US telecommunications industry

A translog cost function is estimated to examine whether carriers use an efficient combination of inputs in the telecommunications industry. Special attention is given to the role of rate regulation reform in an increasingly competitive business environment. Findings suggest that telecommunications carriers facing price-cap regulation do use an efficient mix of labor and capital. In contrast, the condition for cost minimizing use of inputs is not met for telecommunications carriers facing rate-of-return. The superior factor input use allocation by carriers facing price-cap regulation compared to carriers facing rate-of-return regulation is interpreted as suggesting that incentive regulation plays an important role in promoting efficient use of inputs even in a competitive business environment.     

Public utility valuation and risk under incentive regulation

The objective of providing inducements for public utilities to seek to improve the efficiency of their operations has been a longstanding regulatory concern. Among the evolving strategies for furthering that objective is a shift toward what has come to be referred to as incentive regulation. We examine here how this departure from past regulatory practice will affect the market value and market risk of the utility firm, and the specific manner in which an incentive mechanism can be implemented in order to achieve a desired valuation outcome. A particular focus is the establishment of boundaries on allowed rates of return under incentive regulation which are consistent with that desired outcome. The likely impact on utility ratepayers is considered.     

Technology and incentive regulation in the Italian motorways industry

Making use of an original dataset containing information on 20 Italian motorways concessionaires over the 1992–2004 period, we study the technology prevailing in the motorways industry in Italy. We focus on the estimation of the technical progress for the years covered by our sample, and on the measurement of the economies of scale and density. We find that the industry has experienced significant technical progress and that there are sizeable economies of density and scale (at least up to a medium-large network size). These results provide valuable insights for regulatory purposes, notably for the definition of the optimal dimension of the network of a concessionaire and the correct setting of the X factor in the price cap formula, which is used to regulate the toll levels. We also control for the effects on the performance of the concessionaires due to the changes in the ownership structure and the regulatory regime, both introduced by the recent reform of the industry. We find that the productivity of the concessionaires has not increased with the adoption of a price cap regime, while it has benefited from the privatization process.      

知识产权保护:动机与效用分析

在知识经济和全球化时代，知识产权保护已成为国际贸易领域中的一个重要问题。本文从全球贸易环境的角度考察一国对知识产权保护的动机。知识产权保护内含着时间不一致问题：事前，为促进创新政府有加强知识产权保护的动机，一旦创新活动产生后，则有弱化保护的冲动。政府在选择知识产权保护政策时要权衡模仿和创新的利弊。政府政策的连续性、有约束力的多边保证机制及有效的单边报复机制均有助于保护知识产权，促进创新，推动经济增长。     

Command-and-control regulation,incentive for pollution abatement,and market structure

Journal of Regulatory Economics - This paper analyzes the effect of command-and-control regulation on firms’ incentives for pollution abatement, market structure, and social welfare. We...     

An optimal incentive scheme for planning with targets

In socialist economies incentive schemes that contain targets are useful to planners since planners must allocate output to various users. We use a principal-agent model to show that under certain circumstances a first-best Pareto-optimal incentive scheme containing a target exists.     

The impact of incentive regulation on productivity in the US telecommunications industry: A stochastic frontier approach

This paper investigates whether the substitution of price cap regulation (PCR) and other forms of incentive regulation for traditional rate of return regulation (RRR) has had a measurable effect on productivity growth in the US telecommunications industry. A stochastic frontier approach is employed to compute the efficiency change, technological progress, and productivity growth for 25 LECs over the 1988-1998 time periods. By examining the relationship between the change in productivity growth and regulatory regime variables and other control variables, we find that PCR has a significant and positive effect, both in contemporaneous and lagged specifications.     

An incentive pricing with two types of qualities and users

This paper analyses quality discrimination when the monopolist provides two types of qualities for two-types of users, for example, in the software market. The users using software are confronted with two types of quality in using the software: one is related to learning, while the other is operation. In addition, the users are discriminated by the frequency of utilization for software, for example, low-demand and high-demand users. In this paper, the characteristics for bi-directional quality distortion in both learning quality and operation quality are analysed. It is shown that the distortion can occur both for low demanders and for high demanders. Finally, from public policy, a subsidy mechanism is introduced.     

Coal gasification: An economic evaluation

Political interest in developing the capability to produce gaseous fuel from coal in the United States has been cyclical in nature, depending primarily upon the security of the international market for oil and public attitudes toward nuclear power. Interest in coal gasification technology by private investors, however, depends primarily on the economic and technological considerations analyzed in this paper. A cost forecasting model is developed with the capability to take into account future economic and technological uncertainties associated with producing high BTU gas (a substitute for natural gas) from coal. The cost forecasting model incorporates probabilistic information on key economic and technological parameters subject to future uncertainty and simulates, by Monte Carlo methods, the costs which private investors would incur over the life of a commercial size coal gasification plant. The results suggest it is highly unlikely that the coal gasification process could produce high BTU gas more cheaply than the price at which natural gas is likely to be available.The cost forecasting model is also modified to compare the cost per kilowatt–hour of generated electricity when fueling a 1,000 Mw power plant with oil versus high BTU gas from coal. Again, based upon the costs to private investors, the simulation results indicate a very low probability that high BTU gas from coal would prove the least costly fuel for generating electricity.The implied economic infeasibility for private investment in coal gasification does not necessarily provide a basis for public policy to abandon the technology. Public policy recommendations must consider social costs as well as private costs. Possibly the greatest social cost associated with abandoning coal gasification is the risk of a significant energy supply interruption. A diversified national energy policy including coal gasification may in fact be less costly if relevant social costs are included in the calculations. Results from the cost forecasting model indicate the size and type of public subsidies that may be necessary to support a diversified energy industry which would include coal gasification.     

Optimal incentive schemes: Existence and characterization

A set of conditions under which the principal—agent problem admits solutions is given, and conditions characterizing such solutions are defined. As a consequence it is shown that ‘joint-risk-aversion’ leads to optimal contracts which are continuous.     

Risk and regulation: An empirical test of the relationship

The relationship of the variance of rates of return and estimates of systematic risk to the nature of the regulatory paradigm is examined for Bank Holding Companies in Australia. Strong evidence is found to support the hypothesis that shareholder risk is negatively related to the intensity of regulation.     

Wage-distance regulation in social-welfare programs: An option-theory perspective

It is often argued that low-skilled workers have an incentive to escape to the unofficial sector if welfare benefits come too close to the net wage in the official sector. Upper limits of welfare benefits often serve as an instrument to ensure a sufficiently high income differnetial between sectors. However, if unofficial-sector income is insecure, and if a change of sectors is costly, an option value of working in the official sector has to be taken into account. This option value reduces the incentive for lowly skilled workers to give up official-sector jobs. Upper limits of welfare benefits might therefore be defined less restrictively.     

The Delphi technique: An experimental evaluation

Much research has been devoted to the Delphi technique. However, very little substantive work has been done on the subject of Delphi accuracy. The purpose of this effort was to test the accuracy of Delphi vs the conference method in making long-range forecasts. College students were used to form Delphi and conference groups that predicted the point spreads of college football games far in advance of play. The results substantiate the claim that Delphi outperforms conference methods on the basis of accuracy for long-range forecasting.     

Resource harvesting regulation and enforcement: An evolutionary approach

We study the evolution of compliance and regulation of a renewable common pool resource, a fishery in particular, with appropriators whose decision on whether to comply or not with harvesting quotas is the result of imitation described by a proportional rule. The regulator first sets the optimal quota and then harvesters can choose between compliance and violation. We investigate myopic regulation and optimal regulation regimes with a proportional fine and an endogenized probability of audit. The outcome of regulation is characterized in terms of monomorphic and polymorphic steady states with respect to compliance. Using numerical simulations stability properties are examined, and sensitivity analysis explores the effect of various parameters on polymorphic steady-state outcomes.