Regulatory Process : Regulatory Challenges - Frequently Asked Questions (Body of Knowledge on Infrastructure Regulation) - What do regulators do that they should not do?

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[Response by Ashley Brown, Jon Stern and Bernard Tenenbaum, July 2009]

Mistakes (Sins) of regulatory commission

Setting unrealistic benchmarks for efficiency or operational improvements;
Unreasonably re-opening investment decisions or privatization agreements ex post (eg, following a change of government);
Setting prices on the expectation that governments will deliver promised subsidies even when it is highly unlikely that governments can or will do so;
Allowing growing divergence between prices and costs;
Creating perverse incentives (eg, high returns for poor performers; socialising all efficiency gains);
No differentiation between customer classes in terms of quality standards (e.g., rural and urban; grid and off-grid);
Establishing low caps on power purchase prices that eliminate incentives to build new generation stations;
Taking emergency decisions that are damaging to long-run market development (eg, on dispatch of hydro plants, or on limiting exports of electricity or fuel inputs);
Asymmetry between price caps and price floors.

Regulatory Process