An important feature of utility regulation is the institutional arrangement within which it occurs because these arrangements affect stakeholders’ beliefs and abilities to influence regulation, the incentives and capabilities of the regulatory agencies, and the role of politics in the regulatory process1. In fact, the institutional structure of regulation takes us back to an earlier point about objectives because this institutional structure plays a significant role in determining the regulator’s objectives.2
If the regulatory agency is subject to daily political pressures, for example, then the agency may place more weight on short-term political goals than on long-term infrastructure development goals identified in the country’s laws. A consequence of the regulator pursing short-term political goals may include prices that are so low as to discourage investment or the politically powerful benefiting more from regulatory policies than the politically weak. There is also a danger that the agency may be subject to capture by operator interests and so serve the interests of the industry rather than pursue the provision of efficient utility services.
To avoid these and other outcomes that serve the needs of special interests, experts generally recommend institutional arrangements that (1) focus the country’s political efforts on establishing laws under which the regulator performs his or her function, and (2) make it easier for customers and other stakeholders to regulate the regulator and policy makers. These arrangements are designed to ensure, to the extent practical, that the regulator’s objectives correspond to the objectives of the population. These arrangements regulate the regulator and policy makers by encouraging regulation under the law and independence, transparency, predictability, legitimacy, and credibility of the regulatory system.
- Regulatory Process covers this in depth.
- This topic is covered in both normative theories of regulation and positive theories of regulation.