What do regulators do that they should not do?

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[Response by Ashley Brown, Jon Stern and Bernard Tenenbaum, July 2009]

Mistakes (Sins) of regulatory commission

  • Setting unrealistic benchmarks for efficiency or operational improvements;
  • Unreasonably re-opening investment decisions or privatization agreements ex post (eg, following a change of government);
  • Setting prices on the expectation that governments will deliver promised subsidies even when it is highly unlikely that governments can or will do so;
  • Allowing growing divergence between prices and costs;
  • Creating perverse incentives (eg, high returns for poor performers; socialising all efficiency gains);
  • No differentiation between customer classes in terms of quality standards (e.g., rural and urban; grid and off-grid);
  • Establishing low caps on power purchase prices that eliminate incentives to build new generation stations;
  • Taking emergency decisions that are damaging to long-run market development (eg, on dispatch of hydro plants, or on limiting exports of electricity or fuel inputs);
  • Asymmetry between price caps and price floors.

Resources

Handbook for Evaluating Infrastructure Regulatory Systems
Washington, DC: The World Bank Group, 2006.
Brown, Ashley C., Jon Stern, and Bernard Tenenbaum