Environmental and Safety Issues

  1. Role of economic regulators in developing and overseeing environmental and safety issues, including effects of regulation on incentives for using renewable energy sources
  2. Developing standards related to health, safety, and environmental factors
  3. Models of interaction with agencies charged with concurrent oversight of health, safety, and environmental issues

Core References

Environmental Externalities, Congestion and Quality under Regulation
in Infrastructure Regulation and Market Reform: Principles and Practice, edited by Margaret Arblaster and Mark Jamison. Canberra, Australia: ACCC and PURC, 1998, pp. 185-196.
Forsyth, P.

Explains that one option for dealing with externalities is to allow full pass through of externality charges; however, the operator would have no incentive to reduce its creation of externalities. Another option is for the regulator to forecast the cost of controlling the externality and to adjust the price-cap accordingly. A third approach would be to allow partial pass through of the externality cost. In some cases, the regulator may be able to shift the externality charge on to the users, rather than to the operator, which would be appropriate if customer demand is the primary driver of the externality, i.e., the operator cannot affect the amount of the externality nor its cost.

The Economics of Regulation: Principles and Institutions
Cambridge, MA: MIT Press, 1988, Reissue Edition, vol. I, Chapter 7.
Kahn, Alfred

Explains that externalities are generated to some degree in every economic transaction, and those transactions involving regulated firms are no different. Therefore, regulated firms and unregulated firms to behave in the same manner and whether the firm is regulated or unregulated the same review process should apply.

Leapfrogging Technology: Cost-Effective Solution for Pollution in Developing Countries?
Note no. 254 in Public Policy for the Private Sector, Washington, D.C.: World Bank Group, February 2003.
Kojima, Masami

Explains that governments in developing countries should be cautious with technology-based environmental regulations – industrial-country practices may be costly because these countries have already “picked the low-hanging fruit,” that is, they have already taken low-cost-high-impact measures, such as providing water connections and controlling disease. Recommends that developing countries try to leapfrog to existing industrial-country practices may miss taking low-cost-high-impact steps. Also, developing countries may not have sufficient industrial infrastructure to maintain the more expensive technologies. Lastly, the combination of country risk and technology risk may make it too costly to invest in some newer technologies.

Feasible Financing Strategies for Environmentally Related Infrastructure
2003.
OECD

Describes the application of a software tool FEASIBLE that matches environmental investment timetables with funding availability.

OFWAT Annual Report 2003-2004
2004.
OFWAT

Describes collaborations with environmental regulators, use of environmental considerations in pricing, getting consumer input on environmental issues, environmental policy recommendations, effects of incentives on decisions that affect the environment, and monitoring environmental impacts.

Utility Regulators: Roles and Responsibilities
Note no. 128 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 1997.
Smith, Warrick

Explains that utility regulators’ main focus is economic regulation to control market power. However, utilities are also subject to other regulation, including safety and environmental. Suggests that putting these different regulations under one agency concentrates expertise and avoids coordination costs, duplication of effort, and greater complexity. However, keeping economic regulation separate from safety and environmental regulation may be required to avoid conflicts and problems of having sector-specific regulations and general regulations under a single agency.

Sectoral References

ELECTRICITY

Making Competition Work in Electricity
New York: Wiley & Sons, 2002, Chapter 5.
Hunt, Sally

Explains that under traditional regulation, the costs of complying with environmental regulations were passed along to consumers; however, in restructured competitive markets, there is no explicit mechanism like this and operators view these as any other costs. Explains that spot prices will normally include the marginal environmental costs of the marginal generator. Also, the three methods of environmental control include best available control technology, output limitation, and cap-and-trade. Suggests that the cap-and-trade mechanism is the preferred method since it prices clean air and the cost of the permits goes directly into the market price of electricity, rather than indirectly through temporary or permanent closures of generating plants. As for green power, suggests that the aim should be to make it easy for them to enter competitive markets whenever they are economic and, if they are to be subsidized, to subsidize in a way that does not impact the mechanisms that make the market competitive.

Transmission investment and renewable generation: Consultation document
October 2003.
OFGEM

Examines how transmission investment affects renewable generation. Considers wind power, generation in remote areas, cost recovery, the effects of price controls, business risk, and policy options.

TRANSPORTATION

Road Safety in Africa: Appraisal of Road Safety Initiatives in Five African Countries
Sub-Saharan Africa Transport Program Working Paper, number 33, World Bank, Washington, D.C., 1998.
Assum, Terje

Examines road safety in five African countries. There are a wide range of problems resulting in low safety levels and, even, in problems assessing what those levels are. These range from low emphasis on the part of donors and, in many cases, local transport authorities, to corruption.

Regulating Public Automobile Transport: The Major Issues
Institute for Privatization and Management Research Center, Minsk, Belarus, 2005.
Babikci, Dzmitry and Stephan von Crammon-Traubadel

Examines public automobile transport in Belarus. As the structure of the sector changes with the development of private providers, the syetem of state regulation of public transportation needs to be reformed as well. The two major types of regulations needed are regulations on technical and safety standards, and market regulations. Paper focuses on the need for independent regulatory bodies to provide sound regulation for local transportation markets.

WATER

Updating the Overall Performance Assessment (OPA) – A Consultation
December 2003.
OFWAT

Examines alternative performance measures for water utilities, including environmental performance measures.

Linking service levels to prices
February 2002.
OFWAT

Examines policies for linking service levels to prices, including environmental issues.

Key Words

Externalities, Tradable permits, Incentives, Penalties, Rewards, Monitoring, Environment

 

Case Studies

OFWAT Annual Report 2003-2004
2004.
OFWAT