Improving regulation of natural monopolies

In my recent article in the ACCC’s Network magazine (“What would an efficient regulatory contract look like?”, available here), I argue that Australia’s current regulatory system for natural monopolies (such as electricity, gas and water networks) is in need of fundamental reform, because it does not serve the long-term interests of consumers very well at all. In particular the current regulatory system:

  • insulates regulated business from market forces far too much, resulting in substantial over-investment; and
  • introduces unnecessary rigidities into prices,

Regulation is supposed to mimic the outcomes of competitive markets, as we know they serve consumers best. The biggest problem of current regulatory practice is that it focuses on irrelevant by-products of competitive markets – asset values and normal rates of return – rather than on how to deliver efficient outcomes that best serve consumers’ interests.In the article, I advocate four reforms that would better serve consumer interests:

1. Introduce market mechanisms (capacity auctions and secondary markets) to set network capacity/usage prices.

2. Improve network capex decisions by:
a. leveraging hard evidence produced by market mechanisms and network users to understand the values of capacity expansions;
b. offering menus of explicit user funding obligations (only where necessary) to network service providers and, where possible, competitive providers;
c. reallocating investment risks to network service providers.

3. Eliminate the use of regulated asset values and replace them with explicit user funding obligations.

4. Transfer decisions on how user funding obligations are paid from network service providers to regulators, in consultation with network users.

This entry was posted in Economic reform, Economic regulation, Paul Kerin, public policy. Bookmark the permalink.

Leave a Reply

You must be logged in to post a comment.