Light-handed Regulation Research Articles

Capital bias in the Nordic revenue cap regulation: Averch-Johnson critique revisited

Nordic energy market reform and the regulation of local monopolies in electricity transmission and distribution sectors have served as role models for many other countries worldwide. The first contribution of this paper is to clarify the conceptual distinction between the Nordic revenue cap approach and the British revenue cap regulation. Our second contribution is to show that the Nordic revenue cap is similar to the U.S.-style rate of return regulation in that both are subject to capital bias, known as the Averch-Johnson effect. The third contribution of this paper is to examine the magnitude of the capital bias and its welfare effects by means of numerical simulations. We show that the Nordic revenue cap generally decreases the monopoly profit, increases the output, decreases the price, and hence increases consumer surplus compared to the unregulated monopoly. The simulation results prove robust to changes in the parameter values and the functional form of the production function. Our numerical simulations reveal that relatively light handed regulation suffices to yield the main benefits.

Telecom déjà vu: a model for sharing in the broadband Internet

ABSTRACTThere is significant debate over whether there remains a last-mile broadband bottleneck. In this paper, we explore what might be the nature of this bottleneck and review options for regulatory responses. Building on our work in CommAct2021, we expand on our discussion of the need for a reformed Communications Act and FCC to have a capability to mandate shared access to potential bottleneck facilities in the Internet ecosystem. We explain why this framework will require public utility-like regulatory authority, which should be used sparingly since it conflicts with the desirable evolution toward light-handed market-based regulation underway. We review the lessons from earlier efforts to mandate sharing and explain why the earlier approach based on common carrier Title II is problematic and why we think our proposal for a new Title II as part of a new Communications Act offers a better path forward.

Political economy of voluntary approaches: A lesson from environmental policies in Japan

In this paper, we attempt to identify the reasons behind the differences in environmental policy between Japan and other developed countries, particularly the US. Japan’s environmental policy is unique in that voluntary approaches have been taken to reduce total emissions. This strategy is quite different from the traditional approach of heavy-handed regulation. In Japan, voluntary approaches are conducted through negotiations with polluters. The idea behind this type of voluntary approaches is that the government can induce polluters to abate emissions voluntarily by using light-handed regulations and the threat of heavy-handed regulations. The light-handed regulation is quite effective especially when it is costly to introduce heavy-handed regulations, although the negotiations are difficult to conduct when the number of stakeholders is large. To strengthen our analysis, we provide some examples of Japanese environmental policies which are successful and the ones that are not.

Passenger representation within the light-handed regulation – Insights from the Australian air transport market

This article critically reviews the representation of passengers within the light-handed regulation (LHR) that has been in place in the Australian air transport market since 2002. The focus is the commercial negotiations between airlines and airports concerning investments that affect passengers as key stakeholders, end-users, and payers. The article draws on literature on consumer representation and willingness to pay, as well as data from 21 in-depth interviews. The findings suggest that within the current arrangement, passengers are dependent on airlines as their representatives, although their interests may differ concerning investments in airport infrastructure and services. This dependency is leveraged by the current airline duopoly in the Australian domestic air transport market because passengers have no transport alternatives among which to choose. Airports charging passengers their fees (and eventually negotiating prices for improved services) directly is not deemed a suitable option because it could increase the airports' market power and affect the passenger experience negatively. Recommendations, such as involving an independent representation body and diversifying service provision at the airport, are discussed as possibilities for increasing passengers’ influence.

Monitoring quality of service at Australian airports: A critical analysis

The quality of service monitoring forms a key element of the current light-handed regulation at Australian airports. The ACCC (Australian Competition and Consumer Commission) evaluates and publicly reports the quality of service levels of the four largest airports on a yearly basis to pressure airports to maintain an acceptable service performance. This article aims to provide an in-depth analysis of the methodology used by the ACCC. This analysis includes a critical review of the methodology based on secondary information in combination with primary research (i.e., data from 21 semi-structured interviews) that considers the current perception of the methodology among key stakeholder groups. The research finds that the methodology used by the ACCC is underpinned by some limitations, putting in question its effectiveness, reliability and validity. Particularly, its weak design does not allow for a comprehensive interpretation of the reported results or a reliable comparison across monitored airports, thus reduces transparency. Stakeholders pointed out that it is not possible to evaluate whether an airport undertakes infrastructure investments that ensure both the efficiency of ongoing airport operations and appropriate levels of service quality. These limitations add to the perception that the ACCC in its current function is not a ‘credible threat’ to airports with market power. Recommendations and future research directions are provided to address the identified limitations.

Licence to build, licence to charge? Market power, pricing and the financing of airport infrastructure development in Australia

In 2017, airport privatisation in Australia reached a 20-year milestone, with its regulatory framework been shifted to a light-handed regulation in 2002. The light-handed regulation (LHR), as in place at Australia's top four airports, has been suggested as the ‘frontier of international policy’, leading to increasing interest among transport policymakers and researchers. This article offers an in-depth examination of the LHR with focus on a) the market-power of the regulated airports, b) the commercial price negotiations between airports and airlines, and c) the airports' behaviour towards infrastructure investment. The article reports on data from 21 semi-structured interviews conducted with key stakeholder groups affected by, or with expertise in, the LHR. Findings suggest that despite airports possessing significant market power, particularly in the domestic market, the light-handed approach seems to balance the forces in a market where an airline duopoly prevails (Qantas and Virgin Australia groups). In addition, both airports and airlines perceive that commercial price negotiations are improving and refrain from a return to a stronger regulation environment. For airlines, value-for-money is the primary concern in new infrastructure investments. Interviewees also outlined specific recommendations for improving the LHR framework, including a more accessible arbitrator and improved methodologies to monitor prices and quality of service. The findings point towards the significance of vertical relationships, long-term arrangements, and transparency as key aspects of the LHR and the development of airport infrastructure.

Pre-financing airport investments, efficiency and distribution: Do airlines really lose?

This paper assesses the practice of pre-finance, which is very often used by airports to fund major investments, such as runways and terminals. It involves the airport charging airlines higher prices as soon as, and sometimes before, the project's construction commences, often well before it becomes operational. Generally, airlines strongly oppose pre-finance. This paper assesses pre-finance in terms of a range of different impacts. It begins by determining which airports can make use of pre-finance- only those which have market power can do so. Allocative efficiency is enhanced by pre-financing, though the impact is smaller in the case of runways subject to slot controls than when facilities are congested. An important issue concerns the distributional impacts-is the airlines' opposition to pre-finance well founded? It is shown that airlines actually lose by two mechanisms. One of these arises when different airlines and their passengers use the airport when the airport is investing and when it becomes operational. With the second, airlines lose and their customers actually gain, when slot controlled runways are pre-financed. How the airport is regulated has an impact on the incentives of the airport to pre-finance. In particular, price capped airports have an incentive to pre-finance, if allowed to by the regulator, but airports subject to light handed regulation do not seem to have strong incentives either way. The paper concludes by investigating two contrasting case studies.

“Giving” in to social pressure

We develop a theory of charitable giving in which donors feel social pressure from a direct solicitation. We show that equilibrium donations are concentrated around a social norm. Despite a higher level of the public good, relatively poor and/or low altruism givers fare worse under social pressure and would avoid the solicitor at a cost. Aggregate donor welfare improves to the extent that the added social motive alleviates the underprovision of the public good; however, overprovision may result. Our theory therefore predicts a light-handed regulation for charitable solicitations, which is consistent with their exemption from the popular Do Not Call list in the U.S. We further show that contrary to pure altruism, a more equal income distribution may produce more of the public good. In fundraising campaigns where a social norm is not apparent, one may emerge endogenously if donors are not too heterogeneous.

A general framework for price regulation of airports

Price cap regulation (PCR) was first implemented for privatized utilities in the UK in the 1980s. It has since been adopted by numerous countries as a regulatory regime in several sectors. This paper focuses on the development of different forms of price regulation of airports of which PCR is one variant. In countries where airport privatization is still in the early stages, the spectrum of airports and varied nature of regulatory regimes can be confusing and the lack of a general framework can itself become an obstacle to privatization. This paper proposes a general framework comprising decisions to be made for seven variables which is able to accommodate the diversity of airports and varied approaches that may be required as well as transitions between approaches. These approaches include light-handed regulation, price or revenue yield caps, rate of return regulation, earnings sharing, as well as choice of till.

Light handed regulation–Can it play a role in the developing world?

The private sector has become essential for the development of airport infrastructure worldwide, but ICAO maintains that all governments ultimately are responsible for protecting users from the abuse of market power and therefore they need to establish appropriate regulatory arrangements. Nevertheless, economic regulation is difficult, it involves risk of failure, it can be costly, and careful analysis might well suggest that presumptions of significant market power are not supported by the facts. Developing countries, in particular, face challenges in providing necessary financial and (qualified) human resources for their regulatory authorities, but such regulation also has to function in a sub-optimal framework.We review less ‘intrusive’, less ‘prescriptive’, and potentially less costly models of regulation that have been applied in some developed countries. Such “light-handed regulation” does not involve direct ex-ante determination of airport prices or other terms and conditions by an external regulator. In particular we consider Australian and New Zealand experiences with light-handed approaches to regulating airports including price and quality of service monitoring, information disclosure, and negotiate-arbitrate-regulation. The various forms of light-handed regulation are examined in terms of their need for regulatory intervention and the extent to which they offer the prospect of a reduced need to maintain regulatory “infrastructure”. The paper concludes that negotiate-arbitrate regulation, or a variant of it, offers the potential of a light-handed form of economic regulation which could be applied to airports in developing countries taking account of the institutional setting in which such regulation has to function.

A comparison of price-cap and light-handed airport regulation with demand uncertainty

This study analytically compares the performance of ex ante price-cap airport regulation vs. ex post light-handed airport regulation in the presence of demand uncertainty. Our modeling results suggest that light-handed regulation is a promising method which may lead to higher welfare than price-cap regulation. However, neither regulation strictly dominates the other in terms of welfare, airport charge or service quality. The relative performance of alternative regulations depends on many market factors and the specification of penalty under light-handed regulation. Our analytical results also suggest that if service quality matters and if an airport is allowed to invest in a higher quality, average cost pricing may not be optimal due to possible sub-optimal choices of quality, and the overall performance of alternative regulatory regimes should be assessed with a comprehensive welfare analysis. Our investigation confirms that light-handed regulation is worth preserving subject to monitoring and continuous improvements.

'Giving' in to Social Pressure

In light of recent evidence, we develop a theory of charitable giving in which donors feel social pressure from a direct solicitation. We show that equilibrium donations are concentrated around a social norm: donors below the norm increase giving while those above the norm reduce it. Despite a higher level of the public good, relatively poor and/or low altruism givers fare worse under social pressure and would avoid the solicitor at a cost. Aggregate donor welfare improves to the extent that the added social motive alleviates the underprovision of the public good; however, overprovision may result. Our theory therefore predicts a light-handed regulation for charitable solicitations, which is consistent with their exemption from the popular Do Not Call list in the U.S. We further show that contrary to pure altruism, a more equal income distribution may produce more of the public good. In fundraising campaigns where a social norm is not apparent, one may emerge endogenously if donors are not too heterogeneous. In fact, multiple social norms may form, which offers a focal point argument for suggested donations.

The design of light-handed regulation of airports: Lessons from experience in Australia and New Zealand

The difficulties experienced with traditional forms of economic regulation of airports involving direct control of prices have led to an interest in light-handed regulatory frameworks. Experience with light-handed regulation of airports is primarily confined to Australia and New Zealand. The paper examines the design features of light-handed regulation in Australia and New Zealand in relation to the stated objectives associated with the introduction of light-handed regulation. The paper identifies important aspects associated with the design of light-handed regulation including the incorporation of a credible threat of stronger regulation and the characteristics of this, and an apparent trade-off in objectives achieved with different approaches to light-handed regulation.

Light-handed Regulation in New Zealand Banking and Financial Services: Has it worked?

This paper reviews banking regulation in New Zealand from the deregulation of the1980s through to the present day. It focuses on the effects of light-handed regulationthat was introduced as part of the deregulatory process and examines its effectivenessfor protecting depositors and at preventing the (potential) looting of New Zealandbanks by their foreign owners. It notes the extent of reregulation now being undertaken.

The Effects of the change in Telecommunication Regulation on Incentive for Network Investment and Innovation - Based on Korean Telecommunications Regulation Changes-

This paper analyzes the impact of the change in telecommunication regulation changes including the unification of telecommunication service on network investment. The unification of telecommunication service plays a role of separating behavior regulation from entrance regulation and reducing entrance constraints. Therefore, it is expected that the market spillover effect is high through the improvement of behavior regulation. In addition, the effects of the other regulation changes in the 2010 Telecommunications Business Act revision are analyzed. This paper discusses critical factors affecting the decision making process in respect to the firm level and analyzes the impact path guiding investment and innovation. The key findings are as follows. First, the impact of entrance deregulation depends on the intensity of deregulation. If the intensity is not high, this regulation increases the incentive on investment and innovation. However, if the intensity is high as shown in abolishing of licensing, it affects the incentive negatively. Second, if interconnection regulation focuses on existing facilities or the intensity is not strong, this light handed regulation might increase investment and innovation. However, if interconnection obligation is expanded to the facility not constructed or the facility applying new technology, this regulation might deteriorate investment. Third, price deregulation increases the competition of service but it also increases the business opportunity, which means positive effect on investment. Finally, the paper proposes the guideline for telecommunications policy.

Light-Handed Charity Regulation: Its Effect on Reporting Practice in New Zealand

Internationally, there has been a steady increase in the number of countries instigating charity regulation. While the Charity Commission for England and Wales was established by the Charitable Trusts Acts of 1853, since 2005 the Office of the Scottish Charity Regulator, Charity Commission for Northern Ireland and the Singaporean Charity Council were established almost contemporaneously with New Zealand’s Charities Commission. In other countries (such as Canada and the United States) tax authorities register and monitor charitable activity leading to a perception that charities need regulation if the donating public's trust and confidence is to increase.Public interest theory suggests that regulation increases organisational transparency through reducing information asymmetry, protects (or encourages) a competitive market, leading to a distribution of resources which is in the public interest (Gaffikin, 2005). While these arguments are commonly used to call for regulation in the private (for profit) sphere, nonetheless they may explain the increase in the number of bodies regulating charities internationally.Notwithstanding a need for regulation, the cost of complying with these regimes is often an issue, especially for small and medium-sized charities and therefore regulator tend to take a light-handed approach to small and medium charities' information provision (for example, Hind, 2011; Morgan, 2010a). Responding to the call by Hyndman and McDonnell (2009) for research into charities regulation, its rationale and operation, this paper ascertains the impact of a light-handed enforcement regime on small and medium charities' reporting. In so doing, it analyses the General Purpose Financial Reporting (GPFR) practices of a selection of 300 small and medium-sized charities registered with the New Zealand Charities Commission against the Charities Act requirements and hence the rationale for this regulator. It uses this analysis to predict how the regulator's activities

Australian airport regulation: Exploring the frontier

In 2002 Australia removed its price freeze on major airports and instituted light-handed regulation including price monitoring. Internationally, this policy is at the frontier. In general it has worked well but there are concerns that it is ineffective in protecting against windfall gains for airports, that investment incentives are a weak link, that Sydney Airport has deferred investment and let service quality fall, and that airlines are still vulnerable to airport market power. These concerns do not justify re-imposition of price control but they require a method for addressing them. Airlines have proposed independent dispute resolution. Experience elsewhere suggests that concerns about this approach are unjustified, and that it would take light-handed regulation forward.

German airport regulation: Framework agreements, civil law and the EU Directive

Commentators have argued that German airport regulation lacks independence and an economic focus. They have recommended UK-style price control. However, framework agreements and civil law cases deserve more consideration than they have hitherto received. The problematic process of setting price caps has led to constructive engagement in the UK and light-handed regulation in Australia, which deserve consideration in Germany. The recent EU Directive emphasising the process of consultation and agreement between airports and airlines could be a step forward if it introduces properly independent dispute resolution.

If the Genes Fit, Wear Them: A Proposal for Light-Handed Regulation of Direct-to-Consumer Genetic Tests from the Federal Trade Commission as a Solution to a Regulatory Commons Problem

This article suggests that increased, fragmented regulation of Direct-to-Consumer genetic testing, as proposed by many commentators and interest groups, will not benefit consumers and risks hampering American innovation. This article briefly discusses some of the problems that can occur with broad, multi-agency regulation and specifically why it is unwarranted and ill-advised for Direct-to-Consumer genetic testing. Rather than focusing on hypothetical consumer harms, this article takes a holistic approach, taking into consideration the welfare of consumers and our nation’s interest in promoting innovation. The article goes on to propose a solution that refreshingly simple yet will maximize the benefits of the innovation while minimizing risks to consumers. The article theorizes that by simplifying the regulation scheme and decreasing the number of agencies involved, the remaining agencies will take greater ownership over the regulation and consumers will benefit.

Competition by regulation in energy markets: the case of Turkey

A fundamental question facing the regulatory and competition authorities is whether to delegate competition policy issues of utilities to regulatory agencies or competition authorities. While, some countries prefer ‘light handed regulation’ by competition authorities, others grant substantial power to independent regulatory agencies. Turkey followed the liberalization wave in electricity with a regulatory reform in 2001. Recently, a slight shift of tide has appeared in previously liberalized markets. Electricity markets are the forefront example of this change of course. A similar trend is apparent in Turkey as well. Increasing pressures on prices and excess demand have created more reasons for active government involvement. As political factors weigh in, economic considerations take a secondary place in electricity markets. In order to show the tension between political and economic preferences, we use the Pareto and Kaldor-Hicks criteria of welfare economics metaphorically. This paper discusses the scope of competition policy in the Turkish electricity industry. We focus on the issue of regulatory governance. The absence of a well established institutional environment reduces the potential role of competition policy in the industry and increase political meddling in all segments of the Turkish electricity market. By looking into changes in prices, market power and new entry closely, we discuss the relative success of the regulatory reform in the electricity industry. We conclude by emphasizing the consequences of a passive competition authority in establishing a competitive electricity market.