Regulation of network infrastructure investments: an experimental evaluation

Abstract

This paper reports the results of an experiment evaluating three regulatory schemes for network infrastructure, in terms of their ability to generate efficient levels of capacity investment. We compare the performance of (1) price cap regulation, (2) a regulatory holiday for new capacity, and (3) price cap regulation with long term contracts combined with a secondary market. The setting is one in which network users can benefit from acting strategically, and are better informed than the network operator about demand growth. We find that the regulatory holiday creates an incentive to underinvest relative to optimal levels. Long term contracts also fail to improve on single price-cap regulation, and may reduce investment by providing noisier signals about future demand.

The dark side of price cap regulation: a laboratory experiment

“…More specifically, Staropoli and Jullien (2006) and Kiesling (2005) survey the use of laboratory experiments for the design of energy market regulation. These experiments inform regulatory politics about the comparative advantages and disadvantages of competing proposals for intervention, and aim at spotting unanticipated counterproductive effects before a new policy is implemented (fine examples include Brandts et al 2008;Henze et al 2012;Kench 2004;Rassenti et al 2003;Vossler et al 2009). Our approach differs in that we endogenize the regulator.…”

Institutional Reforms to Enhance Urban Water Infrastructure with Climate Change Uncertainty

“…In classical utility regulation, the choice of regulatory instrument (rate of return, cost-plus, price cap, etc.) heavily influences the level of investment (Liston, 1993;Hirschhausen et al, 2004;Henze et al, 2012). The rate of return regulation, despite its name, does not allow the regulated utility to set prices and hence provides the least flexibility in setting prices (Guthrie, 2006).…”