In what ways, if any, should regulators treat SOEs differently than investor-owned infrastructure operators?

[Response by Sanford Berg and Katharina Gassner, May 2009]

Economic incentives used by regulators work differently on private and public companies: this observation should influence what particular regulatory policies are pursued. Some policies will be similar, such as those related to accountability, transparency, and citizen participation. Some regulatory policies will be different, like supporting government policy to corporatize and then commercialize a SOE. Other areas require careful analysis of the impacts of different types of incentives, for example choosing between cost of service regulation and high-powered incentives based on price caps (RPI-X). The initial prices, opportunities for cost containment, and risk allocation all affect this choice. If current prices are far below operating cost for the SOE, the issue is not limiting the exercise of market power, but

• Encouraging corporatization and commercialization (to reduce inefficiencies);
• Determining whether prices (and operations) result in cash flows that yield the appropriate return on investment;
• Identifying a feasible business plan that provides funds for investments (for network remediation and expansion)
• Establishing appropriate targets for cost reduction and quality indicators, and
• Promoting improvements in internal governance including incentives for high performance.