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Implementing incentive regulation and regulatory alignment with bounded regulators

May 2014

Second economic conference of the French railway regulatory body

 

This presentation is based on the eponymous paper (Glachant, Khalfallah, Perez, Rious & Saguan, 2013). We apply the methodology developed in this paper to the railway sector.

Indeed, it is puzzling today to explain the diversity and imperfection of regulation applied to network monopolies, e.g. in the electricity sector or in the railway sector. We argue that two sets of fundamental characteristics should be deemed when searching for the most appropriate regulatory tools to implement. First, the bounded endowment of regulators set by the governments and the legislators determines their abilities (staff, budget, judicial powers) to implement any of the regulatory tools. Ranging these tools from the easiest to the most complex to implement, they are: a- cost plus, b- price/revenue cap, c- output regulation, d- yardstick competition or e- menu of contracts.

Besides, the regulator must take into account that the network monopolies perform multiple tasks with heterogeneous regulatory characteristics in terms of controllability, predictability and observability. These tasks characteristics determine what type of regulatory tool is more likely to better regulate each network monopoly’s tasks. In general, incentive schemes should be implemented with tasks responding well to the criteria of controllability and predictability. It is then the level of observability of these tasks which should set the particular incentive tool to implement.

Conclusions for the regulation of network monopolies’ tasks are then derived from the actual regulatory capability of regulators. This framework is applied and illustrated to different tasks or outputs of a railway operator, namely maintenance, punctuality and RD&D for very high speed train. 

 

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