Second Approach: Knowledge

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In addition to using competition to overcome asymmetries in information and objectives, regulators can also decrease information asymmetries by obtaining information on the operator and markets, typically including financial data and operating statistics. Obtaining the information is not enough: Regulators need to use the information for decision making. But set information gathering out separately as a tool because it is critical to all aspects of regulation.

The financial data that regulators require from operators typically include balance sheets, capital structure, income statements, cash flow statements, and depreciation schedules. Regulators can gather financial data from a variety of sources, including reports to shareholders and taxing authorities, but the most common approach is to require the operator to provide the regulator with financial statements annually in accordance with a uniform system of accounts, which is a set of regulator-determined accounting rules that define the accounts and the accounting practices that the operator must follow when reporting financial information to the regulator. Analysis of this information for purposes of regulating overall price levels is described below in the subsection on Financial Analysis.

Operating statistics typically include information on prices, quantities of individual services sold, numbers of customers, numbers of employees, quality of services provided, sources of fuel or water, electricity generator or water treatment operating statistics, etc. usually annually or monthly. In electricity markets, where competition among electricity generators takes the form of an auction for the right to sell electricity for a given time period, regulators may need to obtain information on bid prices and actual sales.

Information is also important for the regulator whose job it is to monitor or facilitate competition. In these cases, the regulator would need information on such things as prices, sales, market shares, essential facilities, services offered, and geographic areas served.

Footnotes

  1. Financial Analysis focuses on obtaining and using information.