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Title: Use and Abuse of Regulated Prices in Electricity Markets: "How to Regulate Regulated Prices?"

Author(s): David Martimort, Jérôme Pouyet and Carine Staropoli

Publication Date: June 2019

Keyword(s): Electricity markets, government's redistributive concerns, optimal discretion and regulated tariffs

Programme Area(s): Industrial Organization

Abstract: We consider the regulation of the tariffs charged by a public utility in the electricity sector. Consumers differ in terms of their demands which are private information. When regulating the firm's tariffs, the government is concerned by redistribution across consumers classes. A conflict between redistribution and screening induces production distortions even when the firm is a monopoly. Introducing competition with an unregulated fringe may improve efficiency but jeopardizes redistribution. In response, the government may now want to manipulate information about the incumbent's cost so as to restrict entry and better promote its own redistributive objective. To prevent such obstacle to entry, the government's discretion in fixing regulated tariffs of the incumbent should be restricted. This can be done by imposing floors or caps on those tariffs and/or by controlling the market share left to the competitive fringe. We highlight the determinants of such limits on discretion and unveil to what extent they depend on the government's redistributive concerns.

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Bibliographic Reference

Martimort, D, Pouyet, J and Staropoli, C. 2019. 'Use and Abuse of Regulated Prices in Electricity Markets: "How to Regulate Regulated Prices?"'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13801