Incentive Regulation and Efficient Pricing

1
Incentive Regulation and Efficient Pricing

• Monica Giulietti
• Aston Business School
• and
• Catherine Waddams Price
• Centre for Competition and Regulation,
• University of East Anglia

2
Incentive Regulation and Efficient Pricing

• Motivation for incentive regulation
• Types of constraint and incentives for
  rebalancing
• Application in the UK and US
• Response
• Conclusions
• Post script on competition in electricity

3
Motivation for Incentive Regulation

• Significant sectors of economy for industry and
  residential sectors
• Efficiency important driver
• productive
• allocative (efficient pricing)
• Poor experience with rate of return regulation
  (US) and nationalisation (UK)
• Freedom from political interference

4
Nature of incentives

• Average price-caps offer opportunities to
  rebalance prices (constrained profit
  maximisation)
• Common background in uniform price or r.o.r.
  regulation (over capital intensive)
• Movements in relative prices to reflect cost and
  demand conditions
• Incentives under regulation and competition
  (entry deterrence)

5
Relative cost and demand elasticity
6
Hypotheses

• 1. fixed charge increases relative to variable
• (113 price series)
• 2. long distance/high cost charges increase
  relative to lower cost (42 price series)
• 3. peak charges increase relative to off-peak (78
  price series)
• 4. relative charges for frequent payment
  increase, moderated by demand (13 series)
• 5. more cost reflective pricing as competition
  introduced (58 series)

7
Introduction of price-caps and competition
8
Methodology

• Statistical test for change in level and trend
  for the following ratios
• individual tariffs relative to average bill
• (e.g. fixed charge or charge for long distance
  calls)
• relative change in average bills
• (e.g. for customers with different payment
  methods)

9
Summary of results (1)
10
Summary of results (2)
11
Conclusions

• little response to (short term) incentive
  regulation in price rebalancing
• other profit maximising behaviour
• influence of rate of return element?
• political influences still important?
• competition much more influential
• implications for other countries

12
PS Electricity Competition(with Evens Salies)

• Charges made at 3 different consumption levels
  (high, medium, low) for 3 payment methods at
  April 2002, prices deregulated
• 14 regions, 17 brand names (some co-ownership)
• Transmission (peak) and distribution costs
• Regional customers, area, income
• Dummy variables for
• Brand
• Incumbency
• No or very low standing charge

13
Findings

• Cost coefficients suggest debit/credit more
  competitive in general, but with remaining
  incumbent power
• Bifurcated market with market power over non
  switchers? Or disequilibrium, new entrants
  competing fiercely
• Prepayment market less competitive, fewer brand
  dummies, no incumbent power
• Lackadaisical competition
• Implications for regulatory/competition
  authorities even after deregulation