Abstract
AbstractRegulatory authorities in the utilities sector typically employ economic evidence and analysis to make expert discretionary judgments under uncertainty. However, economic analysis does not provide clear answers regarding policy outcomes. This exposes regulators to environmental uncertainty, that is, uncertainty regarding the reactions of other actors in the institutional system to their decisions. When policy outcome and environmental uncertainty are high, discretion takes center stage. Will regulators pursue the course of action suggested by economic analysis and their expert judgment or not? What explains this choice? To answer these questions, we carry out a comparative analysis of three British regulatory authorities in the utilities sector: the Office of Communications, the Office of Gas and Electricity, and the Water Services Regulation Authority. We consider two key sectoral and organizational characteristics: the extent of market competition, and statutory discretion. We rely on interview evidence and documentary analysis and a principal–agent framework. Our analysis reveals a paradox: when environmental and policy outcome uncertainty are high, the higher the regulatory discretion, the lower the role of economic expertise in regulatory decisions. Our findings call for a normative reflection on the role of expertise in regulated sectors.
Highlights
Like all bureaucracies, independent regulatory authorities (IRAs) face considerable uncertainty, both with respect to their environments (Milliken, 1987) and with respect to the consequences of their decisions (Krause, 2003)
We examine the use of economic expertise in cases involving high environmental and policy outcome uncertainty for each IRA
In the case of Ofcom, we show that, when uncertainty is high, the high risk of legal challenge leads the regulator to only make decisions that they are sure will withstand court scrutiny. This implies that nonaction is a regulatory decision—corresponding to nonuse of expertise in Schrefler’s typology (Schrefler, 2013)—suggesting that the regulator prefers not to pursue the course of action dictated by economic analysis, even when deemed worthwhile, if doing so carries too great a risk of legal challenge
Summary
Independent regulatory authorities (IRAs) face considerable uncertainty, both with respect to their environments (Milliken, 1987) and with respect to the consequences of their decisions (Krause, 2003). In the realm of economic regulation, including in utilities regulation, the discipline of economics is the cornerstone of regulatory decisions, providing for. Economic analysis is not always capable of reducing uncertainty to acceptable levels In such cases, the regulator has a discretionary choice to make: either pursue the course of action that they deem appropriate, even though its consequences are uncertain, or not pursue it. What explains their choice? How do utility regulators make discretionary judgments under uncertainty? This article addresses these questions in comparative perspective, focusing on the use of economic expertise in three UK IRAs: the Office of Communications (Ofcom), the Office of Gas and Electricity (Ofgem), and the Water Services Regulation Authority (Ofwat). We rely on evidence derived from regulatory decisions and court judgments as well as nine semi-structured elite interviews with regulatory economists working for Ofgem, Ofcom, and Ofwat
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