Natural Monopoly Regulation Research Articles

Overview of Kazakhstani New Anti-monopoly Regulation

The main statute governing competition in Kazakhstan is the Entrepreneurial Code, first adopted in October 2015. Section 4 of the Code in particular is aimed at the protection of competition in Kazakhstan. It primarily deals with anticompetitive agreements and conduct, provides for a control system over economic concentrations, and regulates anti-monopoly investigations. The anti-monopoly provisions of the Code are enforced by the Committee on the Regulation of Natural Monopolies and Protection of Competition within the Ministry of the National Economy of the Republic of Kazakhstan and its regional departments located in each Kazakhstani region and its two main cities (Almaty and Astana). The Committee has a broad range of powers and duties ranging from investigating anticompetitive conduct and imposing administrative sanctions to regulating natural monopolies. The Code generally prohibits horizontal and vertical agreements and concerted actions that lead (or can lead) to restriction of competition, albeit it also provides certain exemptions. The Code includes an exhaustive list of conduct which is prohibited for dominant entities. The Anti-monopoly Committee exercises control over economic concentrations by overseeing mergers, consolidations, acquisitions and certain other transactions.

The Regulation of Natural Monopolies Goes Ahead Market Development

There are three most significant problems for infrastructure sectors of Russia's economy: determination the boundaries of markets for natural monopolies; considerable reduction the scale of cross-subsidization, and attraction of public and private capital into the infrastructure sectors. In this respect, the latest Government initiatives for establishing united natural monopolies regulator seem to outstrip market development. In our view, denoted problems rather than questions about the agency that should make the decisions on the regulation of natural monopolies should be overriding in government policy related to natural monopolies.

Using Supervised Environmental Composites in Production and Efficiency Analyses

Although supervised dimension reduction methods have been extensively applied in different scientific fields, they have hardly ever been used in production economics. Nonetheless, these methods can also be useful in regulation of natural monopolies, where firms' cost and performance are affected by a large number of environmental factors. As economic theory suggests, at the presence of other relevant production or cost drivers, the traditional all-inclusive assumption is not satisfied. This paper shows that purging the data allows us to address this issue when analyzing the effect of weather and geography on efficiency in the context of the Norwegian electricity distribution networks.

The hidden cost of investment: the impact of adjustment costs on firm performance measurement and regulation

In this study, we address a major problem in the measurement of firm performance and the regulation of natural monopolies, namely the intertemporal character of long-term investment decisions. Specifically, we focus on the impact of adjustment costs of investments on estimates of firms’ technical and cost inefficiency. We make use of a nonparametric dynamic data envelopment analysis to investigate the dynamic inefficiency of electricity distribution and transmission companies in the US during the years 2004–2011. These results are compared to their static counterparts. Our empirical findings reveal that ignoring long-term investments and their corresponding adjustment costs significantly distorts both firm-specific and industrial inefficiency estimates and may thus create misleading incentives for the regulated firms to cut investments.

Coase and the Transaction Cost Approach to Regulation

Early economic research on natural monopoly regulation focused on market failure—pricing tariffs and externalities. While Coase’s multi-tariff marginal cost pricing became the standard, his approach to externality regulation as a contractual issue shifted the debate to transaction costs, but failed to recognize the associated political hazards. The renewed approach to regulation is more cognizant of the interplay of transaction costs and political hazards. In this paper, we show that regulatory rigidities arise as a response to political hazards of opportunistic expropriation and challenges from interested third parties to public agents.

Institutional Features of Interaction of the State and of Natural Monopolies

The author examines institutional, as well as economic approaches to natural monopolies investigation. Institutional peculiarities of their development are analyzed; the structure of the institutional environment of natural monopolies is characterized. The problems of regulation of natural monopolies are identified. The process of regulation of natural monopolies is considered through the prism of the effect of dynamic inconsistency. The formal and informal interaction of natural monopolies and government agencies are defined. It is proposed a step-by-step state regulation of natural monopolies with due regard for market instructions maturity. There are formulated additional measures of state regulation of natural monopolies. DOI: 10.5901/mjss.2015.v6n1s3p73

The regulation of water services in the EU

The European Commission’s proposal for a Directive on the award of concession contracts has sparked vigorous public debate and intense opposition. This Directive is controversial because of the nature of the policy it proposes and because the sectors involved are highly sensitive. This Forum examines the weaknesses of the Commission’s proposal and presents an overview of the current issues in water regulation and the provision of water services. The authors analyse the regulation of natural monopolies, water efficiency and upstream competition in the water industry.

Changing the regulation for regulating the change: Innovation-driven regulatory developments for smart grids, smart metering and e-mobility in Italy

For a long time considered as technologically mature, electric systems are now facing a period of rapid evolution, inspired by climate change concerns. Several studies show that current regulation of natural monopolies does not offer sufficient incentives for network operators (and network users) to participate in this process.Taking Italy as a case study, this paper analyses how energy regulation can change to support the current transformation. We describe the recent regulatory interventions in the domain of smart grids, smart metering and electromobility, with a specific emphasis on the provisions aimed at fostering innovation—an issue that until recently has received almost no attention in the literature nor in the practice of regulation.The progress we observe is considerable in all new areas of concern, and, above all, in the regulator's commitment to provide the right incentives for investments in demonstration projects: the acquisition of experience is regarded as essential to move to more sophisticated regulatory instruments. Finally, regulation is also increasingly concerned with network users, both traditional and new, with the objective to stimulate more active behaviours.

Alfred E. Kahn: Regulator and Language Maven

Alfred Kahn’s enduring legacy will be his influence on how economists think about the regulation of natural monopoly. But although the substance of his ideas mattered far more than their style, his influence would not have been nearly as great had it not been for his almost slavish devotion to clear language. His career supports the proposition that most of the heavy lifting in economics relies on just a few basic principles that can be stated in plain English. In this essay, I describe how Kahn’s mastery of those principles made him such an effective regulator, but I also note that events since the 1978 deregulation of the airline industry suggest that he and others at the Civil Aeronautics Board failed to appreciate the extent of unexploited economies of scale in the industry.

The Year in Economics at the FCC: A National Plan for Broadband

The past year in economics at the Federal Communications Commission (FCC) has focused on encouraging the adoption and deployment of high capacity Internet access and the associated networks, commonly termed “broadband.” Our article sketches important economic themes in the FCC’s National Broadband Plan to show how the application of basic principles of regulatory economics takes account of rapid technological change. We discuss natural monopoly regulation, externalities and cross-subsidies, network effects and interconnection, the allocation of scarce inputs, protecting and fostering competitive markets, and consumer protection and transparency as they apply to the development of broadband.

The Year in Economics at the FCC: A National Plan for Broadband

The past year in economics at the Federal Communications Commission (FCC) has focused on encouraging the adoption and deployment of high capacity Internet access and the associated networks, commonly termed “broadband.” Our article sketches important economic themes in the FCC’s National Broadband Plan to show how the application of basic principles of regulatory economics takes account of rapid technological change. We discuss natural monopoly regulation, externalities and cross-subsidies, network effects and interconnection, the allocation of scarce inputs, protecting and fostering competitive markets, and consumer protection and transparency as they apply to the development of broadband.

Book Reviews

Book Reviews

Cost planning as the tool of regulation of natural monopolies

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Government Outsourcing: Public Contracting with Private Monopoly

The article studies the impact of the government budget constraint on the regulation of natural monopolies in adverse selection contexts. The government maximises total surplus but incurs some cost of public funds a la Laffont and Tirole (1993). Government outsourcing is proposed as an alternative to regulation in which firms freely enter the market and choose their prices and output levels. However government can contract ex post with the private firms. This ex post contracting set-up allows more flexibility than regulation where governments commit to both investment and operation cash-flows. This is especially relevant in case of high technological uncertainties.

Public or private water management: Experience from different European Countries

Faced with liberalisation proposals and an increasing internationalisation of water resource management, the question arises as to how a change of the regulatory framework would affect the market structure and the supply conditions in this area. While the term "privatisation" relates to the ownership structure of the providers, the term "liberalisation" implies extensive free market ideas. Privatisation involves the outsourcing of public services from the public authorities to a privately organised organisation. Through this, however, nothing needs to change in terms of the market or the intensity of competition for the commodity in question. Within the framework of privatisation it can also occur that the public monopoly is only transferred to a private monopoly. The term "liberalisation" in addition refers to the basic regulatory constraints: liberalisation signifies the cessation of limitations to competition and supply monopolies, and open competition between several suppliers for the consumers. In the EU-15, the only country where the provision of operational services in the water supply has been totally passed to the private sector is the UK, but this is only true for UK and Wales. Another singular case is France, where there is a mix of mainly private operating companies and municipalities which have divided the regional supply areas among themselves. In six other EU-15 countries where some privatisation took place, either the municipalities or (majority) publicly owned companies are controlling water supply. In the remaining seven countries, the water supply is organised by municipality companies only. In an international comparison, there are three basic models for the regulation of natural monopolies in the public water supply: the Anglo-Saxon, the French and the German model. The delimitation between supervisory bodies and operations in the water supply is strongest in the first model and weakest in the last. This has led to three basic types of privatisation: "full privatisation", "privatisation through delegation" and "privatisation with regulation by the supervisory bodies". These have led to three clearly distinguishable forms of competition: substitute competition simulated by the regulation authorities between private supply-enterprises, competition between private operators for the right to the temporary provision of water supplies, and competition in the product and service markets in the provision of water. In this paper, these different forms of privatisation and liberalisation are described and their impact on competition and market structures is analysed.

Network Regulation Through Ownership Structure: An Application to the Electric Power Industry

We illustrate the properties of a competitive joint venture (CJV) institution as an alternative to traditional natural monopoly regulation of the distribution wires portion of the electricity supply chain. This CJV institution consists of an endogeneous ownership rule and a wires access charge determination rule, with wires use and control rights determined by a firm's market share in the downstream retail market. By exploiting the vertical structure of the electricity supply chain, this CJV institution can generate superior efficiency results in a model presented and analyzed here. The role of the regulator is one of ex post contractual enforcement; thus this institution is not prone to the information problems associated with traditional natural monopoly regulation. We demonstrate that first-best efficiency characterizes equilibrium in a pricing model without investment.

Is Protecting Sunk Investment by Consumers a Key Rationale for Natural Monopoly Regulation?

Why regulate natural monopolies? Conventional economic theory points to the price-marginal cost margin and the ensuing deadweight loss. But this hypothesis does a poor job of explaining the way that regulators behave in practice. In particular, regulators have tended to eschew forms of price discrimination, including Ramsey pricing and peak-load pricing, and have actively pursued stable pricing. When pressed, regulators justify rejection of the conventional theory on the grounds of pursuit of fairness' or equity. Could it be that the conventional economic justification for natural monopoly regulation is flawed? Some economists have emphasised the role of regulation in protecting the sunk investments made by regulated firms. But this hypothesis cannot explain the patterns of regulation we observe in practice, such as why regulators seem to focus more attention on keeping regulated prices down than on keeping prices up. This paper proposes an alternative hypothesis: that natural monopoly regulation exists to protect the sunk investments made by consumers of the regulated firm. This hypothesis can explain many of the practices of regulators which make little or no sense under conventional economic theory, such as the desire to pursue stable prices, the aversion to forms of price discrimination such as Ramsey pricing, and the role of incremental cost as a pricing floor. In my view, this hypothesis goes some way to bridging the remaining gap between economic theory and regulatory practice.

Is Protecting Sunk Investments by Consumers a Key Rationale for Natural Monopoly Regulation?

Why regulate natural monopolies? Conventional economic theory points to the price-marginal cost margin and the ensuing deadweight loss. But this hypothesis does a poor job of explaining the way that regulators behave in practice. This paper proposes an alternative hypothesis: that natural monopoly regulation exists to protect the sunk investments made by consumers of the regulated firm. This hypothesis explains many of the practices of regulators which make little or no sense under conventional economic theory, such as the desire to pursue stable prices, the aversion to Ramsey pricing, and the role of incremental cost as a pricing floor.

Natural Gas Distribution in Italy: When Competition Doesn't Help the Market

In this article consequences of the introduction of competition for the field in the Italian natural gas distribution sector are analyzed. Natural gas distribution constitutes, due to its technical and economic features, a natural monopoly. For this reason, in the framework of the liberalization process, the Italian legislator has introduced, in addition to price regulation, competitive tenders in order to have different operators compete amongst each other for the service concession. After a brief overview of the economic theory referring to natural monopoly regulation and after presenting the liberalization goals and the new regulation system, the critical aspects of the outlined regulatory framework will be highlighted. More particularly the main features of tenders will be assessed, while, in the following section, the meaning of the imposed revenue cap and its tie to the concession fee will be explained. An analysis of possible reasons for extremely high concession fees will be carried out, while evaluating their impact on companies profitability. In the last part of the work, a solution will be proposed in order to build an effective regulation framework where competition for the field could actually lead the market to efficiency.

The role of regulation for sustainable infrastructure innovations: the case of wind energy

Regulation is especially important for infrastructure systems (such as wind energy), which are characterised by a triple regulation challenge in the areas of R&D spillovers, environmental protection, and access to monopolistic bottlenecks. A heterodox approach is used to study the effects of regulation, which starts from a system of innovation and distinguishes different innovation functions. These functions are used as a bridge to incorporate the various paradigms of the effects of environmental and natural monopoly regulation explicitly into the analysis. Case studies for Germany and the USA show that despite an early start, the US innovation system has not worked sufficiently until now. In contrast, regulations in Germany provided for a high functionality of the innovation system wind power, which enabled Germany to catch up internationally. The importance of instrument design highlights that the analysis of the interaction between regulation and innovation must be performed on a rather detailed level.