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ACCC: PRK-July 04 1

Regulatory Economics:Recent Trends in Theory and Practice

ACCC 2004 Regulatory Conference July 29-30, 2004

Sea World Nara Resort

Paul R. KleindorferUniversity of Pennsylvania

[email protected]

ACCC: PRK-July 04 2

The Past 20 Years or So** (A Mostly U.S. Perspective)

• Theoretical Developments Over the Period

• Developments in Practice

• Implications for the Future

**Based in part on the earlier survey by M. A. Crew and P. R. Kleindorfer, “Regulatory Economics: Twenty Years of Progress?” J. of Regulatory Economics, 21(1), January, 2002.

ACCC: PRK-July 04 3

Rationale for Regulation• Theory

– Desire to avoid monopoly inefficiency, but allow for capturing economies of scale/scope

– Protect the consumer from monopoly exploitation• Practice

– Regulatory capture– Opaque Redistribution: taxation & subsidization – Rent-seeking Behavior set in motion with its

consultants and advocates of all stripes• Result:

– Piecemeal and selective implementation of changes and reforms—in tightly coupled systems, like electric power, this has led to real problems.

ACCC: PRK-July 04 4

Regulation Since 1980• Telecommunications

– AT&T divests 7 RBOCs– Privatization of British Telecom– New technologies begin to enter (PCs, optical fibre, the

Internet and wireless technologies)• Natural Gas and Electric Power

– Natural Gas: long-term take-or-pay contracts to an industry driven by competitive forces, intermediaries, risk hedge instruments benchmarked on spots etc.

– Electric Power: Many problems• Other Sectors: Move to the Market

ACCC: PRK-July 04 5

Deregulation ??!!?

• Deregulation is itself an ambiguous term

– Consistent with any change in regulation

– It means what it means!

• Could be taken to mean reducing regulation, but that isn’t how it has worked out.

• Generally: Unbundling & Competitive Entry

ACCC: PRK-July 04 6

Theory: Pre-1980s• Advances of the 50’s-70’s provided the rich

foundations for economic analysis (Samuelson, Arrow-Debreu, The Postwar French School, ...), Welfare Economics in the British School ... Collective Choice to Econometrics to Game Theory, ... Theory was alive and vibrant.

• The Carnegie School on Behavioral Foundations (Simon, Williamson), leading to Tversky-Kahneman, Smith, Plott and the experimentalists

• The Work of Averch-Johnson, Boiteux-Steiner, ... Integration of monopoly theory into General Equilibrium Theory.

ACCC: PRK-July 04 7

Developments in Theory in U.S.• In many ways, the research of 70s & 80s was

inspired in significant ways by the resources invested in microeconomics by AT&T. – Bell Journal (Panzar, Bailey, Sibley, besides established

scholars)– The Baumol School, including Bailey, Panzar and

Willig, and Contestability Theory, Weak Invisible Hand Theorems, Pricing under entry, Multi-product firms, joint costs, cross-subsidy tests ...

• A. Kahn’s Books on Regulatory Economics, spawning a host of innovations in (Non-linear and Priority) Pricing and Regulation.

ACCC: PRK-July 04 8

The New Regulatory Theory• Arguably these developments still had the

traditional “regulated firm” and “regulated markets” in mind as the center-piece of attention. Indeed, most of these were rooted in practical problems, from Telecom pricing to Airline deregulation.

• New Force appeared in early 1980s—Mechanism Design Literature; Information Economics

ACCC: PRK-July 04 9

Enter P-A Type Models • Mechanism-design based Regulation, beginning with

Baron and Myerson (1981) and strongly promoted by Laffont and Tirole (1993), was based on strong assumptions like common knowledge. [Loeb-Magat, Vogelsang-Finsinger, ...]

• Information not available to (or at least not usable by) the regulator even with contested discovery process

• Regulator concedes some information rents to the firm.• Commitment of the Regulator was claimed to be the chief

barrier to achieving the efficiencies demonstrated in these theoretical models.

ACCC: PRK-July 04 10

The Practice of PCR/PBR was DifferentRegulatory Judgment, Not Formulaic

• Littlechild and PCR (Decouple Revenues from Costs): Basic Objectives: Incentives for efficiency while reducing transactions costs and micro management

• On-going adjustments based on true-ups derived from assessment of past returns and likely future conditions.

• The periodic tuning of PCR parameters was very much like the traditional Cost-of-Service rate hearing, with discovery, argument, etc. Little resemblance to the Mechanism-Design Paradigm.


Understanding Regulatory Commitment

• Regulatory commitment is not the appropriate framing of the Achilles heel of PCR. The real problem is missing the essential attributes of the regulatory context.

• Key Difference between Littlechild’s approach and the mechanism design approach: More realistic view of the constraints on regulatory commitment that are likely to be fundamental to the very nature of regulation.

• Commitment as a two-sided process requiring commitment by both sides. This is understood in practice by regulators, companies and investors. Informed consent and reasonable returns, with transparent metrics: Wolak (2004) “smart sunshine regulation”


Major Advances in Regulatory Economics: 1984-2004

• Price Cap Regulation (PCR) and its cousin PBR• PBR: E.g. Yardstick Competition (Shleifer, 1985) leads to

Balanced Scorecards/VAD and detailed Metrics• Cross-subsidy Analysis, and the analysis of the multi-

product partially regulated firm• Depreciation Analysis and Capital Recovery • Empirical tools for productivity assessment • Experimental Economics and Institutional Analysis

(including Market Monitoring)• Auctions and Bidding, Spectrum Auctions, and other

approaches to Privatization• Access Pricing—ECPR, Global Price Caps


Developments in Practice• Some Adventuresome Experiments and Great Lessons!• Practical problems and a general conviction that change

was required have driven the field of Regulatory Economics

• Primary driver in practice has remained the redistribution of monopoly rents

• Increased use of simulation and experimental models to support analysis of regulatory institutions before the fact; Good Development!

• Increased recognition of the key role of independent market oversight and good data.

14

Developments: Electric Power

GENERATION

Plants produce the product -Electricity

TRANSMISSION

The Towers move the product

DISTRIBUTION

The wires carry electricity into

•a house

•a business

•an industry


Big Impacts on Typical Utilities

Old Structure New Structure

G

T

D

Genco

Trading

Ventures

Transmission

Distribution

WholesaleCustomers

New Retail Customers

Existing Retail Customer

Base

???

ACCC: PRK-July 04 16 Fuel Supply Transmission Distribution

Sales&Tariffs End Users

DSM

Inside the Fence Generation

Controls & Onsite Services

MeteringServices

RiskManagement

to EndUser

Local Delivery of

Service

Risk Management of Transmission

Risk Management

of Fuel

Fuel Supply Contracts

Permits for

Env’ment

(Air & Water)

Generation

Risk Management

of Generation

Long- Term Generation

Supply

Economy

Energy Supply

Spinning Reserve On-Call

Wheeling into

Out of & Across

The System

Spinning Resvs

and Frequency

Control

System Control & VAR

Support

Unbundled Electricity Value Chain


Unbundling Pricing and CostingExample: Power Distribution Related Services

• Distribution System Usage• Customer Assistance, Records, Billing and

Collection• Meter Reading• Meter Operation and Maintenance• Meter Connection and Disconnection• Street Lighting and Signal System Support• Other Customer Related Services (Electric)


Changes in Distribution Company Strategy Learning to Spell “Marketing”

Mapping Customers by Their End-Uses and Price SensitivityEnd Uses

Lighting

Motive Power

Transportation

Process/Domestic Use

Climate Control

(Illustrative)Source: EPRI

Residential Commercial Industrial

Annual Market Size

($100 Million)

Relative Price Sensitivity

= Insensitive= Sensitive


Regulatory Issues at the DISCO Level

• Distinguishing competitive advantage from market power abuse (both in Retail and Wholesale Competition)

• Removing barriers to entry to Distributed Generation (DG)

• Establishing default/standard offer obligations & policies

• Performance-based regulation


Transmission“Regional Tranmission Operators (RTO) Design”

“Problems are often the unanticipated result of the solution of some previous problem!”

US Wholesale & Electricity Markets

Western InterconnectionLoad 118,494 MWCapacity 154,377 MWMargin 30%Control Areas 33

Texas InterconnectionLoad 45,636 MWCapacity 55,230 MWMargin 21%Control Areas 9

Eastern InterconnectionLoad 497,644 MWCapacity 585,231 MWMargin 17%Control Areas 98


Transmission: Critical Enabler• Promotes Efficient Technology Mix• Promotes Competition among and with

Generation, including DG• Assures Reliability and Real-time System Balance• But …the Economics are complicated, especially

as relates to the interplay between short-run and long-run decisions

• Need to understand link between physical and financial systems as basis for providing investment and assuring reliability.


The Previous Solution : “Unbundling” Coordinating Physical & Financial Realities


Short-Term & Long-Term Efficiency

Max Welfare = Profits of Service Providers+

Surplus of Consumer Segments

Subject to:

(1) Balancing Equations Relating Injections and Extractions

(2) Security Constraints(3) Ancillary Generation Requirements for

Voltage and Frequency Control


Problems & Solutions & Problems & …• Continuing underinvestment problems in transmission, with 25%

growth in demand expected but only 4% growth in grid investments, underlined by the 8/14/03 blackout in the Northeastern U.S. and Canada

• Similar underinvestment issues may be emerging in some parts of Australia per the Courier Mail, 7/27/04 discussion of Energex and Ergon Energy in Queensland: “Summer Blackouts Loom”

• Four Major Orders Issued by FERC (after 1992 EPAct)– Order No. 888 (1996) (Open Access)– Order No 889 (1996) (OASIS)– Order No. 592 (1996) (Merger Policy Rule)– Order No. 2000 (1999) RTO

• The Search Continues …


Order No. 2000: The Solution?• Regional Transmission Organizations (RTOs)

– Independent from other power market participants– Sole provider in real time of transmission service– Controls transmission dispatch, short-term reliability– “Responsible” for providing reliable, non-

discriminatory service, including a planning function• All transmission owners must place their

transmission facilities under the operational control of an RTO

• Specifies characteristics and functions of the RTO• Establishes a collaborative process to develop

RTOs further, with some incentives for doing so


Solutions and New Problems• The “2000 Model” solves the short-term problem

of dispatch and may also (as in PJM) provide some metrics on overall performance (shadow prices and congestion costs)

• Does not solve the long-term problem. Indeed, it may exacerbate it. PJM FTRs provide valuable metrics on the value of transmission at the “bid-based, security constrained economic dispatch” enabled and executed by PJM in its ISO function, but also incentives to leave congestion in place.


PJM & NGC/NGT

• Congestion Cost Comparisons (nominal $’s)– NGC (1994-2003): > $1Billion to $600 Million– PJM (1999-2003): $60 Million to $460 Million

• What is going on here?– NGC is responsible for congestion costs, paid out of

regulated “uplift” subject to a declining CAP– PJM is an autarchic organization with distributed

ownership and no incentives to manage its congestion costs in the medium and long term


Solutions & New Problems: Regional Transmission Planning (RTEPP)

• Phase 1: New Rules for Merchant Xmission

• Phase 2: RTEPP (the 6-step, multi-year process)– Initial Thresholds on Congestion Costs– Publish the Results – Unhedgeable congestion > UT – Cost/Benefit Analysis– One-year for Market to Respond– PJM “requests” TAPs to make necessary upgrades


Existing and Proposed RTOs• Autarchic: Loosely connected TAPs, with

multiple regulators (state and federal) involved in determining policies that affect revenue and capital recovery; RTO only has real-time operational control, plus “planning”

• Mutualized: Stronger conveyance of decision rights to RTO for expansion and investment planning; RTO operates in the name of TAPs

• Integrated: All transmission assets ceded to the RTO at the launch of the RTO, which then is responsible going forward for management of these assets.


Modeling Reliability/Security Investments z = Joint and Several Investments

STATE #2:Disruption State

STATE #1:System is operating

Time Zero (decisions)

Prob = r(z) Prob = (1-r(z))

RandomEvents


Predicted Results from these Models (Focused on Reliability)

• Autarchic: (Cournot-Nash) Underinvestment in Reliability which is worse the higher the number of TAPs

• Mutualized (Nash Bargaining, for profit): With no transactions costs and full sharing of benefits, reliability investments are the best; transactions costs of bargaining erode efficiency until autarchy is reached

• Integrated (regulated monopoly RTO, for-profit): Lower than Mutualized reliability investments (with TC = 0), but performance penalties lead to improvements if profits and penalties are internalized


Summarizing• Nature of ownership and decision rights fundamental to

reliability and system operations; the issue is not just independence but also decision quality

• Reliability and system balance have important characteristics of a public good and Free Rider Issues are likely to be significant

• Distributed and diverse ownership of the grid remains the central feature and the central problem relating to progress in establishing workable wholesale electricity markets in the U.S.

• To be honest, “we” have not figured out how to combine effectively profit/price regulation, market monitoring and efficient operations of ISOs & market participants


Guiding Objectives?

• UP1*: A successful market and RTO design requires that the RTO have the authority and bear the responsibility for assuring performance of the essential functions of transmission service, from planning and management of grid control and expansion, through real-time balance.

* UP = Utopian Principle


Guiding Objectives?• UP2*: A successful market and RTO design

requires that the RTO have the incentives to be customer focused in defining and delivering transmission service offerings, and in providing information to stakeholders on the performance and planned evolution of the transmission grid going forward.



Guiding Objectives?

• UP3*: A successful market and RTO design requires that the RTO have the incentives to integrate engineering and economic aspects of grid expansion and operations; both good economics and good engineering are required for sustainable operations.

•* UP = Utopian Principle


Guiding Objectives?

• UP4*: A successful market and RTO design requires an organization and governance structure that will provide the RTO appropriate incentives and the autonomy to integrate investment, market interactions and engineering risk analysis without the necessity of multiple regulatory bodies to oversee and micromanage the process.



Natural Gas Markets• Long-term contracts give way to short-term

markets, with well-developed underlying spot markets.

• Unbundling leads to Extensive Intermediation and Brokerage Activity: Long-term objective to have Inter-regional Pipelines as Common Carriers and Multiple Sources of Competition

• Energy Derivatives have become a central feature for price discovery and risk management. Financial Market links are more direct and more evident in restructured markets (JRE, May, 2004).


PRODUCER

PIPELINE

END USER

DISTRIBUTOR

Physical Gas Buy/Sell Transaction

Natural Gas in the U.S.: The Ancien Regime


Natural Gas in the U.S.: The Nouveau Regime

PRODUCER

PIPELINE

END USER

DISTRIBUTOR

Physical Gas Buy/Sell Transaction

MARKETING COMPANY

BROKER

PURCHASING AGENT


The Rise of Risk Management

C

$ 25

$28

A

B $ 22


A

Sell

Buy Buyfor

Resale

Multiple Positions, Multiple OpportunitiesRisk Management is Central Here!


Standardized Products(Energy, Storage, Transportation)

• 5 x 16 On-Peak without Holidays

• 7 x 8 Off-Peak

• Wrap 5 x 8 + 2 x 24

• On-Peak 8 - 22

• Off-Peak All Others (22-8)

• Next Hour, Next Day, Next Week, Next Month, Next Year


Portfolio Optimization Problem*(Typical Energy Risk Mgmt Problem)

• Given a set of fixed obligations demanding Dt on the day, what portfolio of fixed assets and forwards and options should the “Buyer” have to maximize expected profits subject to a risk constraint (to be specified)?

• Options can include both Calls and Puts as well as fixed forward contracts (of some standardized form).

* See P. R. Kleindorfer and L. Li, “Multi-Period VaR-Constrained Portfolio Optimization”, forthcoming, The Energy Journal, 2004.


Value-at-Risk (VaR)

Portfolio P/L

Prob.

0Prob{Loss > x} = γ %

VaR = z(γ)σ - µ


Max Expected Profits subject to a Value at Risk Constraint for any Given PeriodΠ = (Pc – Ps)D Net Revenues

+ Σi[Ps – ei)+ - ri]Qi Call Options/Forwards

+ Σj [pj – Ps)+ - sj]Qj Put Options

- F Fixed Capital Payments

Problem: Max E{Π}

s.t. Pr{Π > -VaR} > γ


Portfolio ExampleAsset Label ei ri mi Mi

Jun Storage 1 25 5 0 1000Jun Forward 2 0 32 -400 400Jun Daily Call 3 40 1.8 -300 300Jun Daily Put 4 25 1.1 -300 300Jun Daily Call 2 5 50 0.6 -300 300Jun Daily Put 2 6 20 0.5 -300 300Jun Hourly Call 7 40 2.2 -300 300Jun Hourly Call 2 8 50 0.8 -300 300Jul/Aug Storage 1 9 25 5 0 1000Jul/Aug Storage 2 10 30 0 0 400Jul/Aug Forward 11 0 40 -400 400Jul/Aug Daily Call 12 50 2.8 -300 300Jul/Aug Daily Put 13 25 0.8 -300 300Jul/Aug Daily Call 2 14 60 1.4 -300 300Jul/Aug Daily Put 2 15 20 0.3 -300 300Jul/Aug Hourly Call 16 50 3.8 -300 300Jul/Aug Hourly Call 2 17 60 2 -300 300


Efficient Frontier (Example)

5050000

5060000

5070000

5080000

50900005100000

5110000

5120000

5130000

5140000

1213

0000

0

1213

5000

0

1214

0000

0

1214

5000

0

1215

0000

0

1215

5000

0

1216

0000

0

All-Period VaR

E{Pi

}


The Natural Gas Industry: a Limited Success• Risk Management well integrated with capital markets and

operational cost management• Market Monitoring (relationships with affiliates) and

Information Sources now “refurbished” after Enron• Market-based Concepts and Planning for Contracting and

Customer Service for Large Customers• Continuing protection for Small Customers under

traditional utility regulation on the distribution side• Safety, Environment and Security Related Risks well

integrated with operations and financial strategies and regulations


Telecommunications

1984 AT&T Divestiture & The RBOCs

1996 Telecommunications Act

Lots of M&A Activity—Not Much Direct Competition

2002-2004 Judicial Decisions


Debate on Sabotage/Divestiture by Vertically Integrated Access Providers

• In telephony the local network conveys major advantages and opens up potential opportunities for sabotage (raising rivals costs and/or decreasing their quality of service)

• Mandy 2000; Weisman & Kang (2001) and Crew, Kleindorfer & Sumpter (2004) show strong incentives for engaging in sabotage and reducing welfare, unless there are very strong economies of scope across retail and wholesale service elements.


ILEC Prior to 96 ActEnd Users

RBOC Networkused for RBOCRetail service

RBOC Retail Sales

Service

Service

RBOC IntegratedOSS

Network OSS Retail Sales

Service

ServiceOrders

ServiceOrders

ServiceOrders


Facility-based CompetitionEnd Users


RBOC Retail Sales

Service

Service

RBOC IntegratedOSS


Service

ServiceOrders

ServiceOrders

CLEC NetworkCLEC Retail SalesCLEC

IntegratedOSS

ServiceOrders

Facility Based CLEC


UNE-P, UNE-Loop andFacility-based Competition

End Users


RBOC Retail Sales

Service

Service

RBOC IntegratedOSS


Service

ServiceOrders

ServiceOrders

CLEC Network

CLEC Retail SalesCLEC IntegratedOSS Service

Orders

RBOC UNE-P/UNE-LOSS

RBOC Networkused for CLECRetail service


Opportunities for “Sabotage”(In Red)

End Users


RBOC Retail Sales

Service

Service

RBOC IntegratedOSS


Service

ServiceOrders

ServiceOrders

CLEC Network

CLEC Retail SalesCLEC IntegratedOSS Service

Orders

RBOCUNE-P/UNE-LOSS

RBOC Networkused for CLECRetail service^^^^^^^^^^^^^^^^

^^^^^^

^^^^^^


Examples of “Non-Price” Sabotage?•Misrouting local calls as toll calls (forcing ILEC customers to dial 1+10 instead of 7 digits)•Failure to load NXXs in LEC switches•Failure to do NPAC dip on LNP numbers•Restrictions on LNP porting (how many)•Mis-administration of 800 database•Issuing “completion indicator” before testing circuit•PIC freeze on CLEC to CLEC transfers•Dropping customers from white/yellow pages after customer selects CLEC•Unnecessary changes to OSS, forcing CLECs to change back-office systems•Scheduling facility cuts during the business day•…..


Divestiture??Crew, Kleindorfer & Sumpter (2004)

End Users

Service

Service


Service

ServiceOrders

ServiceOrders

CLEC Network CLEC IntegratedOSS

ServiceOrders

Facility Based CLECs

CLEC Retail Sales(including formerRBOC sales &Marketing)

NETCO Networkused for CLECRetail service

NETCOUNE-P/UNE-LOSS


Conclusions: U.S. Telecom• For telecommunications in the U.S., it is likely that

sabotage is causing efficiency losses and that divestiture is efficiency enhancing

• Recent actions by DOJ in not appealing rejection of FCC policies on access and competition were based on the claim/belief that technological progress may bring the cure! (Cable-based telephony, together with wireless)

• Divestiture could occur if regulators police anticompetitive practices and RBOCs see the benefit of moving into areas like long distance, broadband and wireless without restrictions. It’s a long shot at this point. Vigilance!

• Rockefellar example shows that divestiture can be very good for shareholders as well!


The Postal Sector Trends in The Global Postal and Logistics Market

Globalisation of business• increasing cross-border

mail and express deliveries• increasing demand for

cross-border logisticservice

Globalisation of business• increasing cross-border

mail and express deliveries• increasing demand for

cross-border logisticservice

New technologies• e-mail / bybrid mail• e-commerce

New technologies• e-mail / bybrid mail• e-commerce

Deregulation• increasing deregulation

in the EU

Deregulation• increasing deregulation

in the EU

Four key trends driving the future developmentof postal operators worldwide

Four key trends driving the future developmentof postal operators worldwide

Customer demand forintergrated serviceofferings

• one stop shop• revenue management

services• integration of post with

businesses’ mail roomoperations

Customer demand forintergrated serviceofferings

• one stop shop• revenue management

services• integration of post with

businesses’ mail roomoperations


European Posts’ Setting the Example• Three major market strategies are evident:

– Global expansion– Pan-European expansion– Focus on domestic market

• National letter-mail markets are drifting into fierce competition (a Global Phenomenon)

• Specialisation and technology will play key roles in the development of large-customer services

• Enhancing cost-efficiency in evidence• M&A Activity to boost international presence and

scope of competencies


Spurt of M&A Activity in the Postal Sector

Royal Mail Group/6 DPWN/34 TPG/49

Express/parcels: Mail: Mail:- 2 - 4 - 18Logistics: Financial Services: Express/Parcels:- 1 - 1 - 13Retail: Logistics: Logistics:- 2 - 7 - 16Financial Services: Express/Parcels: eCommerce:- 1 - 20 - 1

Retail: Consulting/Direct Mail:- 1 - 1Consulting:- 1

La Poste-France/27 Posten AB/9 Canada Post/6

Mail: Mail: Express:- 7 - 1 - 1Express/Parcels: Transport: Logistics:- 9 - 1 - 2Logistics: Parcels: Information Technology:- 2 - 5 - 2Financial Services: Logistics: Consulting:- 2 - 2 - 1eBusiness:- 2Technology/Consulting:- 5


Varying Strategies of Postal Operators

• Sweden’s Posten: For the time being, focus on development of traditional mail services and divestment of non-core subsidiaries: Swedgirodiscontinued in the Baltic countries and Poland, Direct Link in Belgium sold. Posten will also dispose of unprofitable cashier services (120,000 daily customers). Continuing restructuring.

• La Poste, France: Particular focus on European markets through alliances. Approval of five-year € 1 Billion investment programme to increase productivity. La Poste aims to expand its financial services, provoking opposition from banks.

• Royal Mail Group: Postcomm has tightened its control and aims to increase competition in the UK market. Royal Mail (currently unprofitable) is involved in a retrenchment programme: 30,000 job losses (11%) within three years. RM may widen its range of banking and insurance services.


Supply Chain Management Will Increasingly Involve the Management of Global and Rapid-

Cycle Fulfilment Architecture

Source: Turku School of Economics and Business Administration, 24 March 2004


Near-term Outlook for Postal Sector: Global and Integrated Competition

Lettermail is slumping. Pressure on the USO; Move to competitive products by the larger playersThe boundary between public and private operators in the postal marketplace is becoming blurred, raising the usual questions about ”regulated competition”.Globalisation and liberalisation will produce highly competitive, integrated groups in the logistics arena. Collaboration will be a key requirement regardless of whether an operator seeks to provide specialised, regional carrier services or to manage complex intermodal networks.In Europe, moves by smaller Postal Operators to combine with commercial entities and new market entrants could redefine the structure of the global market.


Summary: Some Accomplishments• Access Pricing, e.g. in Postal Worksharing• Peak-load and Real-Time Pricing introduced, but still

underdeveloped• Model-based approaches to yield management and

profitability based on economics– Airlines: Combined price discrimination and peak-load

pricing– Energy: Risk Management and the e-Economy

• Regulation meets the e-Economy: E.g. Implementing the Coasian Ideal in Environmental Regulation

• Generally, Governments worldwide have moved to push GSE’s to commercialization and privatization.


Summary: Continuing Challenges• California, an expensive learning experience for economists

& regulators; complicated by Enronitis• The problem of DSO/USO: Allowing entry as per

Deregulation, but still assuring that the incumbent responsible for DSO is not towed under is complex

• Theory is still about 1-on-1 regulation; the practice is about n-on-m regulation

• Regulation and wealth transfers during the Transition Game – Power of the Incumbent– Transition Charges and Stranded Assets

– The Long-run and the Short-run


Conclusions• Regulatory Economists have accomplished a great deal in

the past 20 years, including an open record of research on questions of continuing importance for major sectors in the economy and a framework for discussing these. This framework drives policy discussions, company strategies, and the market place. This is a global phenomenon, and expertise in regulatory economics has equal currency in Europe, Asia, ASEAN and Latin America as the language and methodology for analyzing regulated industries.

• The diffusion and continuing refinement of this framework as a lever for communication, analysis and action has undoubtedly been an important element of progress in the past twenty years and augurs well for the future.

• Humility about our current state of knowledge is, however, greatly needed and may still be in short supply.

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