Risks – How can the regulator avoid unintended negative consequences when it adopts regulatory decisions?

[Response by Sophie Trémolet and Diane Binder, August 2009]

Utility regulation has three main aims: to protect consumers from abuse by firms with substantial market power, to support investment by protecting investors from arbitrary action by government and to promote economic efficiency. As those groups do not necessarily share the same objectives, regulatory decisions, such as opening the door for new market participants, cutting down on subsidies or favoring a market segment, may therefore lead to negative consequences for one of the parties. Regulatory decisions can especially affect state-owned enterprises, while commercially oriented operators interested in profits may benefit from financial incentives to cope with new regulations and act in the interests of consumers. Normal economic incentives are not likely to be effective for most government enterprises1.

The regulator can mitigate unintended consequences by constantly informing the public of main policy decisions and by carrying out a consultation with all stakeholders at all stages of the regulatory process. The process is as follows:

  • Identify key stakeholders, especially those who may be affected by the outcomes of the process. A communication needs assessment may be required, based on initial survey or consultation, to identify the stakeholders to be included in the engagement. They may include:
    • Customers: traditionally marginalized groups, including poor households, people living in informal settlement and alternative providers. Community organizations or women’s groups may open the path to consumers at large.
    • Workers: many utilities employ more people than what is economically efficient, for reasons of patronage and general job creation. Reforms in general and private participation in particular are seen as a threat for workers that may be laid off to cut costs.
    • Politicians: they may include officials at local level when the reforms are designed at the state levels or politicians who will most probably assume office during the term of the reform process.
  • Identify early on issues that are likely to be politically sensitive. They include among others privatization of infrastructure utilities, cancellation of concessions contracts, arbitrary layoffs, tariff increases, unraveling of existing subsidies, etc.
  • Develop effective ways of interacting with stakeholders. According to Goetz and Gaventa (2001), citizen participation in policy making and in scrutinizing policy implementation can take three different modalities: consultation, representation and influence. These different modes represent the depth of engagement in policy making allowed to citizens. The first modality, consultation, involves opening arenas for dialogue and information sharing. It can vary from one-off to ongoing consultation. The second modality, representation, involves institutionalizing regular access for certain groups in decision making. The third, influence, allows citizens to achieve a tangible impact on policy-making and the organization of service delivery. By promoting transparency (publication of an explanation for every decision) and empowering stakeholders, the regulator seeks to establish an arm’s length relationship with them. Depending on the type of interaction it seeks, different forms of communication will be appropriate (printed materials, focus groups, opinion polls, public hearings, etc.).
  • Set up mechanisms to resolve customer complaints, generally at two levels: the regulatory agency itself, where stakeholders can ask the regulator to reconsider a decision; and a court system, that considers whether the regulator has followed the law when making decisions2Regulators may use alternative procedures, such as negotiated settlements and arbitration, to avoid a costly and lengthy process.



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

Approaches to Private Participation in Water Services: A Toolkit
PPIAF, the World Bank Group, 2006.
PPIAF and The World Bank

Consumer Participation and Pro-Poor Regulation in Latin America
WIDER Discussion Paper No 2002/121, United Nations University, Helsinki, 2002.
Ugaz, C.

Bringing Citizen Voice and Client Focus into Service Delivery.
Institute of Development Studies Working Paper no, 138, University of Sussex, U.K., 2001.
Goetz, A. M., J. Gaventa et al.

Check and Balances in Utility Regulation – the UK Experience
Note n°185 in Public Policy for the Private Sector, May 1999.
Green, R.


  1. Brown, Stern, Tenenbaum (2005).
  2. See Reviews and Appeals of Regulatory Decisions for more details.