There is a growing consensus that the successful development of infrastructure – electricity, natural gas, telecommunications, water, and transportation – depends in no small part on the adoption of appropriate public policies and the effective implementation of these policies. Central to these policies is development of a regulatory apparatus that provides stability, protects consumers from the abuse of market power, guards consumers and operators against political opportunism, and provides incentives for service providers to operate efficiently and make the needed investments.
Because the way regulation is implemented plays such a vital role in infrastructure development and use, most discussions of infrastructure policy focus on how regulation should be done: for example, how to introduce and facilitate competition, how to provide operators with incentives for improved performance, and how regulators should involve stakeholders. The academic literature calls such work normative theories of regulation, but the authors will simply refer to this as normative work.
Normative work is the primary focus of this Overview and the following chapters. The “primary” focus is on normative work because the authors would be in error if they failed to recognize why regulation occurs. For example, there is always a political context within which a country chooses to initiate, continue, or change its regulation of infrastructure. The motivations for regulation affect how regulation occurs and are considered by a second basic school of thought on regulatory policy, namely, positive theories of regulation.
Positive theories focus on the roles of stakeholders in the policy-making process, the results of their advocacy of solutions that address their individual interests, and broader motivations, such as political interests and the public interest.1
The purpose of this Overview is to provide a broad description of the motivations for regulation and the issues that regulation addresses.2 It begins by describing the regulatory problem, which includes issues of market power, opportunism, and asymmetric information. Then the basic approaches of regulation for dealing with these issues are described. Market structure, which examines monopoly power and competition is covered first. Then financial analysis, which regulators use to ensure financial viability, oversee system development and expansion, and protect against excessive price levels is covered. Regulating the overall price level is considered next, followed by issues of rate design. Finally non-price issues, such as service quality, environmental impacts, and social issues, are reviewed, as is the regulatory process, including the management of information.
The remainder of this Overview is organized as follows. The Regulatory Problem defines the regulatory problem from different perspectives and identifies the basic approaches for overcoming the market power and information issues that tend to underlie many regulatory policies. First Approach: Competition describes the first approach, namely the use of competition. Second Approach summarizes the second approach, which is the gathering and use of information on markets and operators. Third Approach: Incentive Regulation examines the last approach, the use of incentive regulation. The remaining sections examine related issues. Tariff Design describes issues in tariff design. Service Quality, Environmental, and Universal Access/Service Issues covers service quality, environmental, and social issues. Regulatory Process examines the regulatory process. Concluding Observations provides concluding observations.
- Rationale for Regulation, the first reference section of General Concepts examines theories of regulation and the rationale for regulation. The section on Regulatory Process of this Overview and Quality, Social, Environmental factors that follow specifically examine how regulators can address this political context of regulation.
- In this Overview, the authors generally refer to the “government” when referring to the development of policies, and to the “regulator” or “agency” when referring the implementation of policy. The authors recognize that the institutional arrangements for developing and performing regulation vary across countries. For example, in some countries, regulatory agencies take initiative in opening markets to competition, while in other countries all such work is done within a ministry. However, it is too cumbersome to try to reflect all possible divisions of responsibilities for regulatory policy in this narrative, so language is simplified here.