Contact: Ashley Creel
The distribution grid for delivering electricity to the user has been paid for as part of the charge per kilowatt-hour that covers the cost of the energy itself. Conservation advocates have promoted the adoption of policies that “decouple” electric distribution company revenues or profits from how much electricity goes through the lines. Their motivation is that usage-based pricing leads utilities to encourage use and discourages conservation. Because decoupling divorces profits from conduct, it runs against the dominant finding in regulatory economics in the last twenty years-that incentive-based regulation outperforms rate-of-return. Even if distribution costs are independent of use, some usage charges can be efficient. Price-cap regulation may distort utility incentives to inform consumers about energy efficiency-getting more performance from less electricity. Utilities will subsidize efficiency investments, but only when prices are too low. Justifying policies to subsidize energy efficiency requires either prices that are too low or consumers who are ignorant.
This paper concludes that attempts to prioritize the pursuit of efficiency via both competition law and industry-specific regulation in New Zealand over the past twenty years is unlikely to be successful in the long run. As politicians ultimately control the rules by which the regulatory responsibilities are allocated, and politicians are themselves pose a potential risk of capture for the industry-specific regulatory processes, the inability of a government prioritizing efficiency objectives to bind its successors to the same objectives means that the efficiency objective is not stable. From the New Zealand experience, the outcome could be total subjugation of industry-specific regulation to direct political control and the abandonment of efficiency as a primary regulatory objective. This suggests that, imperfect though it may be, competition law overseen by a judiciary with greater independence of the political process, offers the best chance of enshrining pursuit of efficiency into the governance of industry interaction, even in industries normally the focus of industry-specific regulation.
The debate of the so-called “net neutrality” has been under the spotlight in the US for many years, whereas many believed it would not become an issue in Europe. However, over the past few months the need to revise the current regulatory framework to encourage investment in all IP networks has led to greater attention for net neutrality and its consequences for investment and competition. After the Commission adopted a “light-touch” approach to the issue at the end of 2007, the European Parliament has started to reconsider the issue, and it is reportedly considering a move towards more pro-neutrality rules. This paper summarizes the main issues at hand in the net neutrality debate and the views expressed by advocates and opponents of the neutrality principle. The problem is described from a multi-sided market perspective, stressing the role of network operators as intermediaries in the “layered” architecture of all IP networks. Finally, the paper discusses whether the European regulatory framework and its interaction with ex post competition policy are likely to solve many of the concerns of net neutrality advocates without any need for ad hoc regulation; and whether currently proposed solutions are likely to prove welfare-enhancing and conducive to a better regulatory environment for future ecommunications.
The Technology Policy Institute
The Technology Policy Institute is a research and educational organization that focuses on the economics of innovation, technological change, and related regulation in the United States and around the world. More information is available at http://www.techpolicyinstitute.org/
Our Publications of Note series includes papers by outside authors on subjects of interest to our audience. We post these papers, with the authors’ permission, to further the public policy debate on relevant topics. Any opinions or conclusions expressed in these papers do not necessarily represent the views of the Technology Policy Institute, its staff, or board members. If you would like to suggest a relevant new paper that should receive wide distribution, please email your suggestion to Ashley Creel.