Incentive regulation in network Industries

The Workshop will aim at reviewing and comparing the experience with the implementation of incentive-based regulation in the energy, transport, and water sectors.

Background

Incentive-based regulation has been used to regulate private monopolies across Europe since the mid-1980’s. It may take a number of different forms, and has been the subject of attention both by academics and practitioners.

When compared to cost-of-service/rate-of-return regulation, incentive-based regulation has been credited with providing greater incentives for efficiency and some degree of flexibility to regulated companies on how to pursue it, while reducing the cost of regulation.

Incentive-based regulation has been the default regulatory approach for network activities in the energy sector for more than three decades. However, it has been increasingly perceived to increase risk and uncertainty in regulated companies’ earnings and has shown its limitation when applied to highly capital-intensive industries.

More recently, with the greater importance of new technologies and therefore innovation, and the massive investments required to decarbonise the energy sector activities, a different approach has been experimented, which put emphasis on the need for innovation and investment, while protecting consumers by ensuring fair prices.

In the transport sector, despite the introduction of competition in many transport modes, infrastructure keeps being operated under monopoly rights or at least under very limited competition in most modes. Incentive-based regulation is increasingly used to foster efficiency in the operation of infrastructure.

In the water sector, cost plus and rate of return are more commonly used by regulators across EU Member States than price and revenue cap tariff setting methods. Nevertheless, great emphasis is being put on performance and quality of service through alternative regulatory tools such as key performance indicators targeting drinking water quality, water losses, pipes breakdown, internal sewer flooding among others. More recently, regulators have started introducing economic incentives to promote the ecologic transition of water and sanitation operators.

Structure

Against this background, the Workshop will be structured in three sessions:

• Session I will focus on the taxonomy for incentive-based regulation, as used in the different sectors covered by the Workshop;
• Session II will review and compare the experience with the implementation of incentive-based regulation in the sectors covered by the Workshop;
• Session III will aim at drawing conclusions, based on the available experience, and at formulating recommendations on best practices for the implementation of incentive-based regulation in the network industries. It will also consider how incentive-based regulation compare with the newer forms of regulation for network industries which have emerged as a result of the increasing need for innovation and investment.

This event is by invitation only.

The event is under Chatham House rules. Please do not tweet speakers’ names, but use our event hashtags: #FSRPolicyWorkshop #BrexitElectricity