Information in the Regulatory Process

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The first step in decreasing the information asymmetry between the government and the operator is to identify the kinds of information that the regulator needs.1 The regulator’s responsibilities and instruments used for regulation determine the regulator’s information needs, although they do not necessarily indicate what the regulator can realistically expect to gather and use.2 As a result, it can be said that information availability determines what regulatory instruments can actually be used. Sufficient and accurate information is important because, without it, the information asymmetry between the regulator and the operator could lead to profit for the operator above its cost of capital; to the regulator making poorly-informed decisions on issues of market structure, service quality, and service availability; or to financial distress for the operator. In general, regulators gather operator accounting and operating statistics on a regular basis.3 This information can be used to assess the operator’s ability to operate efficiently,4 the financial condition of the operator,5 and market demand.6 Additional information is needed for price reviews, perhaps including detailed explanations of past management decisions, adjustments that the operator has made to its historical records, and projections.7

Footnotes

  1. See the reference section on Financial Analysis.
  2. Regulatory Instruments in Foundations of Regulation provides an overview of regulatory instruments. The remaining chapters provide details on regulatory instruments.
  3. See Financial Analysis’ references on Basic Financial Statements and Regulatory Systems of Accounts.
  4. See Price Regulation.
  5. See Earnings Measurement.
  6. See Demand Forecasting for more information about forecasting demand.
  7. See Price Level Regulation for further information on conducting a price review.