Foundations of Regulation

Introduction

As the Overview explains, utility regulation can occur for several reasons. Common arguments in favor of regulation include the desire to control market power, facilitate competition, promote investment or system expansion, or stabilize markets. In general, though, regulation occurs when the government believes that the operator, left to his own devices, would behave in a way that is contrary to the government’s objectives.¹ In some countries an early solution to this perceived problem was government provision of the utility service. However, this approach raised its own problems. Some governments used the state-provided utility services to pursue political agendas, as a source of cash flow for funding other government activities, or as a means of obtaining hard currency. These and other consequences of state provision of utility services often resulted in inefficiency and poor service quality. As a result, governments began to seek other solutions, namely regulation and providing services on a commercial basis, often through private participation.

This chapter on General Concepts in utility regulation covers general themes in utility regulation. It is organized as follows. The following paragraphs describe recent utility market reforms, the development of utility regulation, market structure and how it relates to sector performance, and theories of regulation. References are organized by topic.

Footnotes

1. Recall that there is also a concern about the government’s objectives. This concern implies a need for regulatory processes that enforce commitments, ensure that long term efficiency is not sacrificed for short term political expediency, and treat all stakeholders fairly.