Infrastructure regulation: Lessons from Australia

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Infrastructure regulation Lessons from
Australias experience

• Stephen P King
• Monash University

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What have we learnt?
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What have we learnt?
First point Good regulation is hard
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The regulators dilemma
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The regulators dilemma
Most infrastructure that is regulated provides
inputs to other sectors
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The regulators dilemma
Most infrastructure that is regulated provides
inputs to other sectors
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The regulators dilemma
Most infrastructure that is regulated provides
inputs to other sectors
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The regulators dilemma
Most infrastructure that is regulated provides
inputs to other sectors
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The regulators dilemma
Most infrastructure that is regulated provides
inputs to other sectors
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The regulators dilemma
Most infrastructure that is regulated provides
inputs to other sectors
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The regulators dilemma
Most infrastructure that is regulated provides
inputs to other sectors
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The regulators dilemma
Most infrastructure that is regulated provides
inputs to other sectors
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The regulators dilemma
Regulated firm
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The regulators dilemma
Competitive sector
Regulated firm
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The regulators dilemma
Competitive sector
Regulated firm
End users
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The regulators dilemma
Competitive sector
Regulated firm
Economic Efficiency Objectives
End users
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The regulators dilemma
Competitive sector
Regulated firm
End users
Stay in business
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The regulators dilemma
Competitive sector
Regulated firm
End users
Stay in business
Appropriate investments
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The regulators dilemma
Competitive sector
Regulated firm
End users
Minimize costs
Stay in business
Appropriate investments
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The regulators dilemma
Competitive sector
Regulated firm
End users
Minimize costs
Stay in business
Efficient pricing
Appropriate investments
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The regulators dilemma
Competitive sector
Regulated firm
End users
Appropriate use of input
Minimize costs
Stay in business
Efficient pricing
Appropriate investments
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The regulators dilemma
Competitive sector
Regulated firm
End users
Appropriate use of input
Appropriate downstream configuration
Minimize costs
Stay in business
Efficient pricing
Appropriate investments
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The regulators dilemma
Competitive sector
Regulated firm
End users
Appropriate use of input
Appropriate downstream configuration
Minimize costs
Stay in business
Efficient pricing
Appropriate investments
Impossible!
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The third-best solution
Competitive sector
Regulated firm
End users
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The third-best solution
Competitive sector
Regulated firm
End users
Let the competitive sector look after itself
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The third-best solution
Competitive sector
Regulated firm
End users
Make sure the regulated firm doesnt go bankrupt
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The third-best solution
Competitive sector
Regulated firm
End users
And give it some incentives (perhaps)
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The third-best solution
Competitive sector
Regulated firm
End users
Building block regulation
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What have we learnt?
First point Good regulation is hard - and this
is why we use building block regulation
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What have we learnt?
Second point The regulator's objective
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The humble regulator
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The humble regulator
Should the objective be to maximize the Long Term
Interest of End Users?
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The humble regulator
Should the objective be to maximize the Long Term
Interest of End Users?
No! Insufficient information
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The humble regulator
Should the objective be to maximize economic
efficiency?
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The humble regulator
Should the objective be to maximize economic
efficiency?
No! Insufficient information
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The humble regulator
What can the regulator do?
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The humble regulator
What can the regulator do?
Get out of the way if competition will do an
adequate job.
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The humble regulator
What can the regulator do?
Get out of the way if competition will do an
adequate job.
If competition is clearly inappropriate, minimal
conservative regulation.
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The humble regulator
What can the regulator do?
Get out of the way if competition will do an
adequate job.
If competition is clearly inappropriate, minimal
conservative regulation.
Try and work out how to do make yourself redundant
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What have we learnt?
Second point The regulator's objective should be
to promote competition either directly through
market rules or indirectly through the
conservative, transparent regulation of natural
monopoly services
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What have we learnt?
Third point The regulator's primary tool.
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The regulators task
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The regulators task
Set the revenue that will flow to the regulated
business.
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The regulators task
Set the revenue that will flow to the regulated
business.
Risk allocation/incentives
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The regulators task
Risk is endogenous to the regulatory decision.
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The regulators task
Risk is endogenous to the regulatory decision.
The regulated firm should only bear risks it can
manage (idiosyncratic risk)
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The regulators task
Risk is endogenous to the regulatory decision.
The regulated firm should not bear systematic risk
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The regulators task
Risk is endogenous to the regulatory decision.
So the Asset Beta should be very low.
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What have we learnt?
Third point The regulator's primary tool is ex
ante risk allocation.
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What have we learnt?
Fourth point Privatization.
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The state and the sirens
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The state and the sirens
Politicians need to be protected from short term
temptation.
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The state and the sirens
Politicians need to be protected from short term
temptation.
Arms-length regulators
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The state and the sirens
Politicians need to be protected from short term
temptation.
Arms-length regulators
Arms-length utilities
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What have we learnt?
Fourth point Privatization protects politicians
and the populace.
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What have we learnt?
Fifth point GBE regulation.
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How do we regulate GBEs?
If they are natural monopolies competitive
neutrality makes little sense.
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How do we regulate GBEs?
The tax payers are the shareholders so is the
issue one of optimal taxation?
If they are natural monopolies competitive
neutrality makes little sense.
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How do we regulate GBEs?
Example should GBEs capital costs be the
government borrowing rate?
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How do we regulate GBEs?
Example should GBEs capital costs be the
government borrowing rate?
The case for this is the actual cost to the
GBEs owners
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How do we regulate GBEs?
Example should GBEs capital costs be the
government borrowing rate?
The case against the real risk should be
reflected in electricity prices
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What have we learnt?
Fifth point GBE regulation is what we often do.
But do we know what we are doing?
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What have we learnt?

• Building block regulation is about as good as it
  gets.
• Recognising their own limitations, regulators
  should promote competition to limit their
  activities
• Regulation is about allocating risk
• Government separation is paramount to good
  government

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What have we learnt?

• Building block regulation is about as good as it
  gets.
• Recognising their own limitations, regulators
  should promote competition to limit their
  activities
• Regulation is about allocating risk
• Government separation is paramount to good
  government

65
What have we learnt?

• Building block regulation is about as good as it
  gets.
• Recognising their own limitations, regulators
  should promote competition to limit their
  activities
• Regulation is about allocating risk
• Government separation is paramount to good
  government

66
What have we learnt?

• Building block regulation is about as good as it
  gets.
• Recognising their own limitations, regulators
  should promote competition to limit their
  activities
• Regulation is about allocating risk
• Government separation is paramount to good
  government

67
What have we learnt?

• Building block regulation is about as good as it
  gets.
• Recognising their own limitations, regulators
  should promote competition to limit their
  activities
• Regulation is about allocating risk
• Government separation is paramount to good
  government