Price-cap Mechanism Research Articles

The Socioeconomic Impacts of Emergent Biotechnology on the Next Human Age

Modern biotechnology has progressed to unforeseeable heights, from genetic engineering to radical life extension. The rapid advent of this technology has enforced upon us a duty to contemplate the ethics surrounding it to inform our decisions. One pressing aspect of contemporary bioethics lies in medical developments that have become widely consumed resources. In modern society, big pharmaceutical companies dominate the healthcare industry, which makes them uniquely positioned to introduce new-age biotechnology as consumer resources. A "big pharma" future exemplified by the emergence of revolutionary new-age biotechnology presents severe ethical concerns. This paper describes potential scenarios where emergent biotechnology becomes a consumer resource as a result of aggressive marketing, indirect coercion, and monopoly of the "big pharma" companies. Chasing higher profitability and benefiting from their monopoly position, big pharmaceutical companies can price new biotechnologies at excessive levels, resulting in new biotechnology proliferating along socioeconomic lines. Such a development threatens to create an elite genetic class and destroy social mobility. In order to mitigate such consequences, this paper proposes a price cap mechanism to improve equal access to emerging biotechnology and promote innovations in breakthrough treatments.

Improving efficiency in the MSW collection and disposal service combining price cap and yardstick regulation: The Italian case

Municipal solid waste collection and disposal service is a key element of the European strategy aimed at moving towards a circular economy. An efficient municipal solid waste collection and disposal is closely related to both lower waste tax and higher welfare of the interested population. In Italy, the lack of a centralized regulatory framework has determined heterogeneous performances of sector operators across the country. Firstly, we estimate the productive efficiency in different optimal territorial areas and secondly we forecast the economic benefits that would arise under a new regulatory regime. Our approach combines the well-known yardstick competition and the price-cap mechanisms. Results suggest that if all territorial areas converged to the most efficient ones, a potential saving between 12% and 19% emerges, i.e., up to €2bn savings out of €10.05bn total tax revenue in 2015, the reference year.

Optimal transmission tariff regulation for the Southern Baja-Californian electricity network system

The tariff imposed over the use of electricity transmission networks is one critical factor to achieve efficiency in electricity markets. In Mexico, the current transmission network tariffs are based on long run marginal costs. We propose an incentive pricecap mechanism and apply it to the meshed network system in the isolated electricity system of Southern Baja California, Mexico. We further compare the current transmission tariffs set by the Mexican regulator (cre) with the tariffs resulting from our regulatory scheme. We show that our mechanism prices the network at tariffs rendering superior welfare compared to the tariffs determined by Mexican authorities.

Optimal transmission planning under the Mexican new electricity market

This paper addresses electricity transmission planning under the new industry and institutional structure of the Mexican electricity market, which has engaged in a deep reform process after decades of a state-owned-vertically-integrated-non-competitive-closed industry. Under this new structure, characterized by a nodal pricing system and an independent system operator (ISO), we analyze welfare-optimal network expansion with two modeling strategies. In a first model, we propose the use of an incentive price-cap mechanism to promote the expansion of Mexican networks. In a second model, we study centrally-planned grid expansion in Mexico by an ISO within a power-flow model. We carry out comparisons of these models which provide us with hints to evaluate the actual transmission planning process proposed by Mexican authorities (PRODESEN). We obtain that the PRODESEN plan appears to be a convergent welfare-optimal planning process.

Uniform price mechanisms for threshold public goods provision with complete information: An experimental investigation

We introduce two novel mechanisms for provision point public goods, motivated by the design of uniform price auctions: The uniform price auction mechanism (UPA) collects an endogenously determined uniform price from everyone offering at least that price, while the uniform price cap mechanism (UPC) collects the uniform price from everyone offering at least that price, plus the full offer of everyone offering less. UPC has the same undominated perfect equilibria as standard provision point (PPM) and proportional rebate (PR) mechanisms, and UPA a somewhat broader set. However, our mechanisms' different marginal penalty structures may facilitate equilibrium selection and lead to higher contributions and more frequent provision. Through laboratory experiments, using both homogeneous (symmetric) and heterogeneous induced values, we show our mechanisms improve upon PR and PPM: UPC generates higher aggregate contributions than PR and PPM, leading to higher provision rates than PPM; UPA attracts much higher contributions, although it provides less frequently. This ranking emerges because high offers are more common (especially among high value people in the heterogeneous environment) in the uniform price mechanisms, where higher offers only increase the payment when needed for provision.

Power System Transformation toward Renewables: An Evaluation of Regulatory Approaches for Network Expansion

We analyze various regulatory regimes for electricity transmission investment in the context of a power system transformation toward renewable energy. Distinctive developments of the generation mix are studied, assuming that a shift toward renewables may have temporary or permanent impacts on network congestion. We specifically analyze the relative performance of a combined merchant-regulatory price-cap mechanism, a cost-based rule, and a non-regulated approach in dynamic generation settings. We find that incentive regulation may perform better than cost-based regulation but only when appropriate weights are used. While quasi-ideal weights generally restore the beneficial properties that incentive regulatory mechanisms are well-known for, pure Laspeyres weights may either lead to over-investment or delayed investments as compared to the welfare-optimum benchmark. Laspeyres-Paasche weights, in turn, seem appropriate under permanently or temporarily increased network congestion. Thus, our analysis provides motivation for further research in order to characterize optimal regulation for transmission expansion in the context of renewable integration.

Testing regulatory regimes for power transmission expansion with fluctuating demand and wind generation

Adequate extension of electricity transmission networks is required for integrating fluctuating renewable energy sources, such as wind power, into electricity systems. We study the performance of different regulatory approaches for network expansion in the context of realistic demand patterns and fluctuating wind power. In particular, we are interested in the relative performance of a combined merchant-regulatory price-cap mechanism compared to a cost-based and a non-regulated approach. We include both an hourly time resolution and fluctuating wind power. This substantially increases the real-world applicability of results compared to previous analyses. We show that a combined merchant-regulatory regulation, which draws upon a cap over the two-part tariff of the transmission company, leads to welfare outcomes superior to the other modeled alternatives. This result proves to be robust over a range of different cases, including such with large amounts of fluctuating wind power. We also evaluate the outcomes of our detailed model using the extension plans resulting from a simplified model based on average levels of load and wind power. We show that this distorts the relative performance of the different regulatory approaches.

Power System Transformation towards Renewables: An Evaluation of Regulatory Approaches for Network Expansion

We analyze various regulatory regimes for electricity transmission investment in the context of a transformation of the power system towards renewable energy. We study distinctive developments of the generation mix with different implications on network congestion, assuming that a shift from conventional power plants towards renewables may go along with exogenous shocks on transmission requirements, which may be either of temporary or permanent nature. We specifically analyze the relative performance of a combined merchant-regulatory price-cap mechanism, a cost-based rule, and a non-regulated approach in dynamic generation settings. Through application in a stylized two-node network, we find that incentive regulation may perform satisfactorily only when appropriate weights are used. While quasi-ideal weights generally restore the beneficial properties that incentive regulatory mechanisms are well-known for in static settings, pure Laspeyres weights may either lead to overinvestment (stranded investments) or delayed investments as compared to the welfare optimum benchmark. Stranded investments could then be avoided through proper handling of weights. Model results indicate that using average Laspeyres-Paasche weights appears to be an appropriate strategy in the context of permanently or temporarily increasing network congestion. Our analysis motivates further research aimed to characterize optimal regulation for transmission expansion in the context of renewable integration.

Investment Incentives under Price-Cap Regulation

In the literature on price regulation, the price-cap mechanism is seen as a very powerful incentive mechanism towards efficiency improvements. What about quality investments? The empirical literature is not univocal: Some studies suggest a deterioration of quality, while others do not find any statistically significant impact. We analyze the incentive provided by price-cap regulation in a setting in which the investment decisions of the regulated firm suffer from hold-up, and contacts are incomplete. We show that the incentives to invest in cost-saving innovations can be fostered by a price-cap contract with a “sufficient” regulatory lag, while for other types of investments, such as quality enhancement, the same contract does not help. Furthermore, we show that if the firm faces a binding resource constraint the price-cap contract generates a crowding-out effect between the two types of investment. This might explain the non univocal empirical evidence.

A real options-based model to supporting risk allocation in price cap regulation approach for public utilities

Price cap regulation of public utilities is based on an incentive mechanism to prevent monopolistic infrastructure firms from charging excessive prices. The challenge of this regulation mechanism is to define incentives able to avoid abnormal profits of firms and simultaneously increase quality of service and promote investment projects. A new risk-based approach to support the definition of the fair incentive mechanism as between the regulator, the community and the firm is proposed. The methodology is based on the combined use of real options theory and Monte Carlo simulation. The methodology is then applied to the Italian water market where the regulator adopts a ‘hybrid’ price cap mechanism that gives monopolistic firms the incentive to implement investment projects for reducing the actual infrastructural gap in the water supply system. The results reveal the capability of the proposed model to support public decision makers at the negotiation stage to define the incentive scheme and investment plan able to increase the quality of service allowing a fair risk allocation among parties.

A Dynamic Incentive Mechanism for Transmission Expansion in Electricity Networks: Theory, Modeling, and Application

We propose a price-cap mechanism for electricity-transmission expansion based on redefining transmission output in terms of financial transmission rights. Our mechanism applies the incentive-regulation logic of rebalancing a two-part tariff. First, we test this mechanism in a three-node network. We show that the mechanism intertemporally promotes an investment pattern that relieves congestion, increases welfare, augments the Transco’sprofits, and induces convergence of prices to marginal costs. We then apply the mechanism to a grid of northwestern Europe and show a gradual convergence toward a common-price benchmark, an increase in total capacity, and convergence toward the welfare optimum.

Econometric TFP Targets, Incentive Regulation and the Ontario Gas Distribution Industry

We present a price cap mechanism, which features an external standard, constructed to elicit efficient utility performance. We focus on a method for setting the external standard, which is usually based on industry total factor productivity (TFP), when 'peer' data are not readily available. The procedure is based on an econometric cost model and externalizes the performance target or TFP by using a combination of industry and individual utility data. To highlight the importance of the method, we profile the approach that was considered and partly adopted in the current incentive regulation plan of Ontario's gas distribution industry.

Traffic Management in Wholesale International Roaming: Towards a More Efficient Market?

Despite a general trend of lower charges for mobile calls, in Europe prices for international roaming calls have remained at levels surprisingly high. The apparent reluctance of mobile network operators to lower roaming tariffs is generating many antitrust concerns. This paper presents in a two country - two firm framework, the functioning of the current system governing wholesale international roaming agreements based on Inter Operator Tariffs (IOTs). The focus is on the role of traffic management: thanks to the emergence of traffic direction techniques, MNOs are allowed to select the roaming partner. We show that unless these techniques do not allow for perfect control on traffic flows, traffic management does not improve markets efficiency. In line with the regulatory mechanism recently adopted by the European Commission, we show that a simple price cap mechanism may restore partial efficiency in the wholesale market. We also show that although cross border cooperation at the wholesale level is Pareto efficient it will not emerge as an equilibrium of a two-sided matching game.

Incentive Regulation and Its Application to Electricity Networks

This paper examines developments since the publication of The Economics of Regulation in the theory of incentive regulation and its application to the regulation of unbundled electricity transmission and distribution networks. Conceptual mechanism design issues that arise when regulators are imperfectly informed and there is asymmetric information about costs, managerial effort, and quality of service are discussed. The design and application of price cap mechanisms and related quality of service incentives in the UK are explained. The limited literature that measures the effects of incentive regulation applied to electricity networks is reviewed.

TRAFFIC MANAGEMENT IN WHOLESALE INTERNATIONAL ROAMING: TOWARDS A MORE EFFICIENT MARKET?

Despite a general trend of lower charges for mobile calls, in Europe, prices for international roaming calls have remained at levels that are surprisingly high. The apparent reluctance of mobile network operators to lower roaming tariff is generating many antitrust concerns. This paper presents in a two-country two-firm framework the functioning of the current system governing wholesale international roaming agreements based on interoperator tariffs. The focus is on the role of traffic management; thanks to the emergence of traffic direction techniques, mobile network operators are allowed to select the roaming partner. We show that, unless these techniques do not allow for perfect control on traffic flows, traffic management does not improve the market's efficiency. In line with the regulatory mechanism recently adopted by the European Commission, we show that a simple price cap mechanism may restore partial efficiency in the wholesale market. We also show that although cross-border cooperation at the wholesale level is Pareto efficient, it will not emerge as an equilibrium of a two-sided matching game.

Extended Price Cap Mechanism for Efficient Transmission Expansion under Nodal Pricing

This paper examines the regulatory incentive mechanisms for efficient investment in the transmission network under the ISO and Gridco institutional framework. By considering a new element associated with power flow, we develop an extended price cap mechanism that can properly internalize technological externalities among transmission lines. We show that the new mechanism can induce the Gridco to achieve the long-term optimal capacity expansion in the presence of technological externalities, while the ISO continuously promotes efficient capacity utilization in the short run under nodal pricing.

The Implementation and the Effects of Regulatory Reform

This article reviews trends, outcomes and issues in regulatory reform in OECD countries. First, it summarises the evidence on the evolution of regulatory environments and the economy-wide and sectoral effects of reforms (including privatisation) in both competitive and non-competitive industries in the past two decades. Turning to network industries, it then discusses the main policy issues raised by the need to adapt the regulation of the non-competitive segments of these industries to increasing competition in liberalised markets. It focuses on four topics that dominate the debate over regulatory reform: i) the move from command-and-control to incentivebased regulatory approaches relying on the removal of entry barriers in competitive markets, the adoption of price-cap mechanisms and the design of efficient and competitively-neutral charges for accessing the fixed networks of incumbents; ii) the pros and cons of structural measures such as privatisation, and vertical and horizontal separation of formerly integrated monopolies; iii) the ways to ensure that important non-economic objectives, such as universality of service, continue to be achieved in a more competitive environment at a minimum cost for society; and iv) the design of regulatory mechanisms and institutions that encourage best practice regulation.

Price cap regulation and information acquisition

In this paper we endogenize the information structure under price cap regulation. We show that, in order to induce the firm to acquire valuable but costly information, price cap mechanisms need to ensure high profits to the firm. Further, we compare incentives for information acquisition under price cap regulation and under the optimal mechanism designed to deal with the standard case where asymmetric information is assumed. We show that the latter provides higher incentives for information acquisition and that the welfare loss associated with price cap regulation — with respect to the optimal regulatory mechanism — increases when the issue of information acquisition is considered.

Success factors for the privatisation of airports—an airline perspective

This article examines different approaches to airport privatisation. It shows that privatisation can only be a success when government provides a suitable regulatory framework prior to privatisation. This framework must protect the interests of the consumer and ensure the participation of airlines as primary users in the privatisation project, thus establishing a solid basis for a strong partnership between the airlines and the airport. To accomplish this, the monopoly income of an airport should be subject of a price cap mechanism following the single till principle, best being set up in cooperation with the airlines and controlled by an independent regulator.

The Implementation and the Effects of Regulatory Reform: Past Experience and Current Issues

This paper reviews trends, outcomes and issues in regulatory reform in OECD countries. First, it summarises the evidence on the evolution of regulatory environments and the economy-wide and sectoral effects of reforms (including privatisation) in both competitive and non-competitive industries in the past two decades. Turning to network industries, it then discusses the main policy issues raised by the need to adapt the regulation of the non-competitive segments of these industries to increasing competition in liberalised markets. It focuses on four topics that dominate the debate over regulatory reform: i) the move from command-and-control to incentive-based regulatory approaches based on the removal of entry barriers in competitive markets, the adoption of price-cap mechanisms and the design of efficient and competitively-neutral charges for accessing the fixed networks of incumbents; ii) the pros and cons of structural measures such as privatisation, and vertical and horizontal separation of formerly integrated monopolies; iii) the ways to ensure that important non-economic objectives, such as universality of service, continue to be achieved in a more competitive environment at a minimum cost for society; and iv) the design of regulatory mechanisms and institutions that encourage best practice regulation.