There is a growing consensus that the successful development of utility infrastructure - electricity, natural gas, telecommunications,1
1 [HIDE]
Arguably, telecommunications no longer qualifies as a 'utility' in the traditional sense. However, for purposes of this ARL, we include telecommunications as a utility to simplify discussion. and water - depends in no small part on the adoption of appropriate public policies and the effective implementation of these policies. Central to these policies is development of a regulatory apparatus that provides stability, protects consumers from the abuse of market power, guards consumers and operators against political opportunism, and provides incentives for service providers to operate efficiently and make the needed investments.
Because the way regulation is done plays such a vital role in infrastructure development and use, most discussions of utilities policy focus on how regulation should be done, for example, how to introduce and facilitate competition, how to provide operators with incentives for improved performance, and how regulators should involve stakeholders. The academic literature calls such work normative theories of regulation, but we will simply refer to this as normative work for purposes of this ARL. Normative work is the primary focus of this Overview and the following chapters. We say that our "primary" focus is on normative work because we would be in error if we failed to recognize why regulation occurs. For example, there is always a political context within which a country chooses to initiate, continue, or change its regulation of utilities. The motivations for regulation affect how regulation occurs and are considered by a second basic school of thought on regulatory policy, namely, positive theories of regulation. Positive theories focus on the roles of stakeholders in the policy-making process, the results of their advocacy of solutions that address their individual interests, and broader motivations, such as the public interest.2 2 [HIDE]
Section A of Chapter I examines theories of regulation and the rationale for regulation. Section H of this Overview and Chapter VIII that follows specifically examine how regulators can address this political context of regulation.
The purpose of this Overview is to provide a broad description of the motivations for regulation and the issues that regulation addresses.3 3 [HIDE]
In this narrative, we generally refer to the 'government' when we discuss the development of policies and refer to the 'regulator' or 'agency' when we discuss the implementation of policy. We recognize that the institutional arrangements for developing and performing regulation vary across countries. For example, in some countries regulatory agencies take initiative in opening markets to competition, while in other countries all such work is done within a ministry. However, it is too cumbersome to try to reflect all possible divisions of responsibilities for regulatory policy in this narrative, so we simplify our language. We begin by describing the regulatory problem, which includes issues of market power, opportunism, and asymmetric information. We then discuss the basic approaches of regulation for dealing with these issues. We first cover market structure, which examines monopoly power and competition. We then examine financial analysis, which regulators use to ensure financial viability, guard against cross-subsidy, and protect against excessive price levels. Regulating the overall price level is considered next, followed by issues of rate design. We then turn to non-price issues, such as service quality, environmental impacts, and social issues. We next cover information issues and close with a discussion of the regulatory process.
The remainder of this Overview is organized as follows. Section B defines the regulatory problem from different perspectives and identifies three basic approaches for overcoming the information issues that tend to underlie many regulatory policies. Section C describes the first approach, namely the use of competition. Section D summarizes the second approach, which is the gathering and use of information on markets and operators. Section E examines the last approach, the use of incentive regulation. The remaining sections examine related issues. Section F describes issues in tariff design. Section G covers service quality, environmental, and social issues. Section H examines the regulatory process. Section I provides concluding observations.
