Philip Burns - Academia.edu (original) (raw)
Papers by Philip Burns
Zeitschrift Fur Energiewirtschaft, 2005
Http Dx Doi Org 10 1080 09540969309387742, Jan 7, 2009
Price cap regulation is favoured by many regulators of network utilities because it provides firm... more Price cap regulation is favoured by many regulators of network utilities because it provides firms with an incentive to reduce costs. We question, however, whether this is indeed the most preferable alternative to cost of service regulation, which has recognised lower incentive power. We find, using a quantiative model, that yardstick mechanisms provide better cost reduction incentives because the allowed change in price (the cap) is based on exogenous factors and the firm is able to retain any savings which exceed those made by the industry on average. We also find, from the quantiative model, that the move from a price-cap to a yardstick regime may well constitute a pareto improvement. Regulated companies earn higher returns and customers benefit from lower prices. Bearing this base case result in mind we consider of how changes in the model's assumptions might affect the relative comparison. Specifically we consider how the form of the effort function and the incentive scheme within firms-which arguably differ between countries-impacts on the incentive properties of each regime. We also discuss the question of whether the length of the regulated firm's planning horizon (which is set as a five-year renewal period in the model) affects the relative incentive benefits of yardstick competition. These questions highlight the complexities which remain in the design of regulatory mechanisms, and thereby the areas which warrant further research in the future.
Public Money & Management, 1993
ABSTRACT Our theme1 is regulatory review within a deregulated system — taking the UK electricity ... more ABSTRACT Our theme1 is regulatory review within a deregulated system — taking the UK electricity industry as a detailed case study. The implied contrast derives from the twin objectives imposed on all UK public utility regulatory offices2: (i) to regulate the industry so as to benefit consumers while ensuring the financial viability of the industry, and (ii) to foster competition wherever possible. We shall discover that competitive initiatives are suggested by the regulators as part of the regulatory review procedure. We need to be aware that the electricity industry, when privatised, was also demerged in such a way that potentially competitive activités were separated from the natural monopoly or network activities. In particular, four separate activités are conventionally identified in the UK3: generation, transmission, distribution, and supply. The last refers to the activity of selling electricity to final consumers on preset tariffs or metered half-hourly prices, where the price includes elements for generation, transmission and distribution. In other words the activity of supply requires no generating sets, or wires, merely a list of customers and a billing organization. Each part of the industry has its own set of agents, but only the single transmission company, (National Grid Company), and the distribution companies (12 Regional Electricity Companies) are subject to regulatory review. The regulator expresses opinions about the generating companies4, and may refer their behavior to the anti-trust investigatory body, the Monopolies and Mergers Commission, and he regulates the separate supply business of the distribution companies.
Scottish Journal of Political Economy, 1998
The tension between confiscating profits and inducing productive efficiency is at the heart of th... more The tension between confiscating profits and inducing productive efficiency is at the heart of the regulation debate. It is encapsulated in the contrast between two types of regulatory contract or price rule. Cost plus regulation comprises a profits confiscation rule that aims to achieve allocative efficiency by relating price to reported marginal or average cost. We believe that cost of service regulation and public enterprise guidelines typical of nationalised industries fall into this category, and may be expected to encourage productive inefficiency. On the other hand, fixed price regulation comprises a rule that allows the public utility to be the residual claimant to the profits achieved by lowest cost productive efficiency. In the UK, RPI-X price cap regulation is the outstanding example of this. However, several commentators have argued that fixed price regimes can engender considerable instability for the firm. Schmalensee (1989) simulated the effects of a number of linear regimes in the presence of cost uncertainty and asymmetric information and concluded that 'price caps have been oversold relative to simple alternatives, particularly if regulators are more concerned with consumers' surplus rather than the profits of regulated firms.' Spring (1992) demonstrated that exogenous factors, for example unanticipated inflation, as well as endogenous responses such as volume growth can significantly affect the impact of the price cap on allocative efficiency.
Policy Research Working Papers, 2004
Utilities Policy, 2004
Regulatory instruments have long been understood to have a powerful effect on investment, and par... more Regulatory instruments have long been understood to have a powerful effect on investment, and part of the motivation for introducing higher powered regulatory regimes and contracts was to reduce incentives for inefficiency and over-investment (gold plating) inherent in cost-plus regulatory schemes. In practice, the mix of incentives and the institutional framework that make up a higher powered regulatory regime can also lead to unintended distortions on investment behaviour. In this paper, we examine the key drivers of investment behaviour, and provide some examples of how these drivers have affected behaviour in practice. We conclude with a set of key areas and inter-relationships that are at the core of a regulatory settlement, and therefore need to be designed appropriately to drive efficient behaviour. #
Electricity regulation in the UK is twenty years old, and RPI-X regulation is twenty-five years o... more Electricity regulation in the UK is twenty years old, and RPI-X regulation is twenty-five years old. In this paper, we consider the long-run properties of RPI-X price-capping regulation. We argue that the Bernstein and Sappington (1999) mechanism, which has had a major impact on regulatory behaviour, implicitly assumes short-run behaviour by regulators, and consequently leaves a long-run disequilibrium position unresolved.
Price cap regulation is favoured by many regulators of network utilities because it provides firm... more Price cap regulation is favoured by many regulators of network utilities because it provides firms with an incentive to reduce costs. We question, however, whether this is indeed the most preferable alternative to cost of service regulation, which has recognised lower incentive power. We find, using a quantiative model, that yardstick mechanisms provide better cost reduction incentives because the allowed change in price (the cap) is based on exogenous factors and the firm is able to retain any savings which exceed those made by the industry on average. We also find, from the quantiative model, that the move from a price-cap to a yardstick regime may well constitute a pareto improvement. Regulated companies earn higher returns and customers benefit from lower prices. Bearing this base case result in mind we consider of how changes in the model's assumptions might affect the relative comparison. Specifically we consider how the form of the effort function and the incentive schem...
Bulletin of Economic Research, 1996
The paper develops a cost frontier model of electricity distribution and estimates it on data for... more The paper develops a cost frontier model of electricity distribution and estimates it on data for the 12 regional electricity companies of England and Wales. It is found that some significant cost drivers in cross-section estimation are insignificant when the model is estimated on panel data, highlighting the well-known drawbacks of cross-section estimation. Panel data estimation suggests that the main
Zeitschrift Fur Energiewirtschaft, 2005
Http Dx Doi Org 10 1080 09540969309387742, Jan 7, 2009
Price cap regulation is favoured by many regulators of network utilities because it provides firm... more Price cap regulation is favoured by many regulators of network utilities because it provides firms with an incentive to reduce costs. We question, however, whether this is indeed the most preferable alternative to cost of service regulation, which has recognised lower incentive power. We find, using a quantiative model, that yardstick mechanisms provide better cost reduction incentives because the allowed change in price (the cap) is based on exogenous factors and the firm is able to retain any savings which exceed those made by the industry on average. We also find, from the quantiative model, that the move from a price-cap to a yardstick regime may well constitute a pareto improvement. Regulated companies earn higher returns and customers benefit from lower prices. Bearing this base case result in mind we consider of how changes in the model's assumptions might affect the relative comparison. Specifically we consider how the form of the effort function and the incentive scheme within firms-which arguably differ between countries-impacts on the incentive properties of each regime. We also discuss the question of whether the length of the regulated firm's planning horizon (which is set as a five-year renewal period in the model) affects the relative incentive benefits of yardstick competition. These questions highlight the complexities which remain in the design of regulatory mechanisms, and thereby the areas which warrant further research in the future.
Public Money & Management, 1993
ABSTRACT Our theme1 is regulatory review within a deregulated system — taking the UK electricity ... more ABSTRACT Our theme1 is regulatory review within a deregulated system — taking the UK electricity industry as a detailed case study. The implied contrast derives from the twin objectives imposed on all UK public utility regulatory offices2: (i) to regulate the industry so as to benefit consumers while ensuring the financial viability of the industry, and (ii) to foster competition wherever possible. We shall discover that competitive initiatives are suggested by the regulators as part of the regulatory review procedure. We need to be aware that the electricity industry, when privatised, was also demerged in such a way that potentially competitive activités were separated from the natural monopoly or network activities. In particular, four separate activités are conventionally identified in the UK3: generation, transmission, distribution, and supply. The last refers to the activity of selling electricity to final consumers on preset tariffs or metered half-hourly prices, where the price includes elements for generation, transmission and distribution. In other words the activity of supply requires no generating sets, or wires, merely a list of customers and a billing organization. Each part of the industry has its own set of agents, but only the single transmission company, (National Grid Company), and the distribution companies (12 Regional Electricity Companies) are subject to regulatory review. The regulator expresses opinions about the generating companies4, and may refer their behavior to the anti-trust investigatory body, the Monopolies and Mergers Commission, and he regulates the separate supply business of the distribution companies.
Scottish Journal of Political Economy, 1998
The tension between confiscating profits and inducing productive efficiency is at the heart of th... more The tension between confiscating profits and inducing productive efficiency is at the heart of the regulation debate. It is encapsulated in the contrast between two types of regulatory contract or price rule. Cost plus regulation comprises a profits confiscation rule that aims to achieve allocative efficiency by relating price to reported marginal or average cost. We believe that cost of service regulation and public enterprise guidelines typical of nationalised industries fall into this category, and may be expected to encourage productive inefficiency. On the other hand, fixed price regulation comprises a rule that allows the public utility to be the residual claimant to the profits achieved by lowest cost productive efficiency. In the UK, RPI-X price cap regulation is the outstanding example of this. However, several commentators have argued that fixed price regimes can engender considerable instability for the firm. Schmalensee (1989) simulated the effects of a number of linear regimes in the presence of cost uncertainty and asymmetric information and concluded that 'price caps have been oversold relative to simple alternatives, particularly if regulators are more concerned with consumers' surplus rather than the profits of regulated firms.' Spring (1992) demonstrated that exogenous factors, for example unanticipated inflation, as well as endogenous responses such as volume growth can significantly affect the impact of the price cap on allocative efficiency.
Policy Research Working Papers, 2004
Utilities Policy, 2004
Regulatory instruments have long been understood to have a powerful effect on investment, and par... more Regulatory instruments have long been understood to have a powerful effect on investment, and part of the motivation for introducing higher powered regulatory regimes and contracts was to reduce incentives for inefficiency and over-investment (gold plating) inherent in cost-plus regulatory schemes. In practice, the mix of incentives and the institutional framework that make up a higher powered regulatory regime can also lead to unintended distortions on investment behaviour. In this paper, we examine the key drivers of investment behaviour, and provide some examples of how these drivers have affected behaviour in practice. We conclude with a set of key areas and inter-relationships that are at the core of a regulatory settlement, and therefore need to be designed appropriately to drive efficient behaviour. #
Electricity regulation in the UK is twenty years old, and RPI-X regulation is twenty-five years o... more Electricity regulation in the UK is twenty years old, and RPI-X regulation is twenty-five years old. In this paper, we consider the long-run properties of RPI-X price-capping regulation. We argue that the Bernstein and Sappington (1999) mechanism, which has had a major impact on regulatory behaviour, implicitly assumes short-run behaviour by regulators, and consequently leaves a long-run disequilibrium position unresolved.
Price cap regulation is favoured by many regulators of network utilities because it provides firm... more Price cap regulation is favoured by many regulators of network utilities because it provides firms with an incentive to reduce costs. We question, however, whether this is indeed the most preferable alternative to cost of service regulation, which has recognised lower incentive power. We find, using a quantiative model, that yardstick mechanisms provide better cost reduction incentives because the allowed change in price (the cap) is based on exogenous factors and the firm is able to retain any savings which exceed those made by the industry on average. We also find, from the quantiative model, that the move from a price-cap to a yardstick regime may well constitute a pareto improvement. Regulated companies earn higher returns and customers benefit from lower prices. Bearing this base case result in mind we consider of how changes in the model's assumptions might affect the relative comparison. Specifically we consider how the form of the effort function and the incentive schem...
Bulletin of Economic Research, 1996
The paper develops a cost frontier model of electricity distribution and estimates it on data for... more The paper develops a cost frontier model of electricity distribution and estimates it on data for the 12 regional electricity companies of England and Wales. It is found that some significant cost drivers in cross-section estimation are insignificant when the model is estimated on panel data, highlighting the well-known drawbacks of cross-section estimation. Panel data estimation suggests that the main