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Regulation of Energy Industries

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Abstract

This chapter introduces the concepts related to the regulation of energy industries. It first presents the traditional regulation, followed by the modern concepts of regulation (incentive regulation). The pros and cons of each alternative is discussed as well.

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Notes

  1. 1.

    See for example Viscusi et al. (2005), Shleifer (2004) and Newbery (1999, Chap. 4) for further details. See also the Body of Knowledge on Utility Regulation, an annotated bibliography and for further references. See (http://www.regulationbodyofknowledge.org/).

  2. 2.

    Operating expenses are directly included in the revenue requirement and the entire amount will be recoverable through tariffs over the test year. Capitalised expenses on the other hand will form part of the investment and depreciations will be allowed for use of the capital and the undepreciated investments will receive a rate of return.

  3. 3.

    Cost of capital forms part of an extensive literature in finance. We will not enter into the details of this here.

  4. 4.

    Normally debt includes both short- and long-term debts unless a special provision is made to account for the cost of short-term debts.

  5. 5.

    See Viscusi et al. (2005) or (Appendix A to Chap. 2 of Kahn 1989).

  6. 6.

    Reserve margin is the excess capacity over peak demand which is maintained to tide over emergency conditions.

  7. 7.

    See IPART (2001) for further details on these options.

  8. 8.

    We will not discuss IRP in detail in this chapter. Interested readers may refer to Swisher et al. (1997).

  9. 9.

    See Alexander and Harris (2001) for a discussion on multi year tariff controls.

  10. 10.

    Here we follow Ros (2001). Also see Bernstein and Sappington (1998).

  11. 11.

    Factor productivity is a measure of efficiency of conversion of inputs to outputs in the production process. Total factor productivity measures how efficiently a firm transforms all its inputs into aggregate outputs.

  12. 12.

    In practice this function is not known and Farrel (1957) suggests that such a function can be constructed from using observed data. The production possibility is then called the best practice frontier.

  13. 13.

    We have considered it separately from price caps and revenue caps considering it a sub-set of incentive regulation. Some authors (such as NARUC 2000 or Comnes et al. 1995) consider PBR as an umbrella concept similar to incentive regulation and discuss price caps, revenue caps and other mechanisms under this. It may be somewhat misleading.

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Authors and Affiliations

  1. Centre for Energy, Petroleum and Mineral Law and Policy, University of Dundee, Dundee, UK

    Subhes C. Bhattacharyya

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  1. Subhes C. Bhattacharyya
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Correspondence to Subhes C. Bhattacharyya .

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Bhattacharyya, S.C. (2011). Regulation of Energy Industries. In: Energy Economics. Springer, London. https://doi.org/10.1007/978-0-85729-268-1_28

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  • DOI: https://doi.org/10.1007/978-0-85729-268-1_28

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