DP4934 Optimal Sliding Scale Regulation: An Application to Regional Electricity Distribution in England and Wales

Author(s): David Hawdon, Lester Hunt, Paul L Levine, Neil Rickman
Publication Date: February 2005
Keyword(s): electricity distribution, regulation, sliding scale
JEL(s): L51
Programme Areas: Public Economics, Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=4934

This paper examines optimal price (i.e. ‘sliding scale’) regulation of a monopoly when efficiency and managerial effort are not observed. We show how to operationalize this model of incentive regulation and use actual data from electricity distribution in England and Wales to make welfare comparisons of sliding scale regulation with a price cap regime and the First-Best (the full information case). Our method enables us to quantify technical uncertainty as faced by the electricity regulator in the 1990s and shows that there are significant welfare gains from a sliding scale relative to the price cap regime.