nep-reg New Economics Papers
on Regulation
Issue of 2013‒06‒04
eleven papers chosen by
Natalia Fabra
Universidad Carlos III de Madrid

  1. Unobserved heterogeneous effects in the cost efficiency analysis of electricity distribution systems By AGRELL, Per; FARSI, Mehdi; FILIPPINI, Massimo; KOLLER, Martin
  2. Democracy and Regulation: The Effects of Electoral Competition on Infrastructure Investments By Arthur Schram; Aljaz Ule
  3. Investment and Efficiency under Incentive Regulation: The Case of the Norwegian Electricity Distribution Networks By Rahmatallah Poudineh; Tooraj Jamasb
  4. Integrating Intermittent Renewable Wind Generation: A Stochastic Multi-Market Electricity Model for the European Electricity Market By Jan Abrell; Friedrich Kunz
  5. Robustness, outliers and Mavericks in network regulation By AGRELL, Per; NIKNAZAR, Pooria
  6. The Photovoltaic Crisis and the Demand-side Generation in Spain By Pere Mir-Artigues
  7. Benchmarking and regulation By AGRELL, Per; BOGETOFT, Peter
  8. Reforming the postal universal service By GAUTIER, Axel; POUDOU, Jean-Christophe
  9. Recalibrational Emotions and the Regulation of Trust-Based Behaviors By Eric Schniter; Timothy Shields
  10. Understanding best practice regarding interruptible connections for wind generation: lessons from national and international experience By Karim L. Anaya; Michael Pollitt
  11. Institutions, competition and regulation: Intellectual property and innovation By Tucker, C.E.

  1. By: AGRELL, Per (Université catholique de Louvain, CORE and Louvain School of Management, Belgium); FARSI, Mehdi (University of Neuchatel); FILIPPINI, Massimo (ETH Zurich and University of Lugano); KOLLER, Martin (ETH Zurich)
    Abstract: The purpose of this study is to analyze the cost efficiency of electricity distribution systems in order to enable regulatory authorities to establish price- or revenue cap regulation regimes. The increasing use of efficiency analysis in the last decades has raised serious concerns among regulators and companies regarding the reliability of efficiency estimates. One important dimension affecting the reliability is the presence of unobserved factors. Since these factors are treated differently in various models, the resulting estimates can vary across methods. Therefore, we decompose the benchmarking process into two steps. In the first step, we identify classes of similar companies with comparable network and structural characteristics using a latent class cost model. We obtain cost best practice within each class in the second step, based on deterministic and stochastic cost frontier models. The results of this analysis show that the decomposition of the benchmarking process into two steps has reduced unobserved heterogeneity within classes and, hence, reduced the unexplained variance previously claimed as inefficiency.
    Keywords: efficiency analysis, cost function, electricity sector, incentive regulation
    JEL: L92 L50 L25
    Date: 2013–02–22
  2. By: Arthur Schram (University of Amsterdam); Aljaz Ule (University of Amsterdam)
    Abstract: This paper investigates infrastructure investment in markets where regulation is subject to varying degrees of manipulation by elected politicians. Based on a model of price regulation in a market with increasing demand and long-term returns on investment we construct a multi-period game between a service provider, consumers with voting rights and elected decision makers. In each period the consumers elect a decision maker who may then regulate the price for service provision. Before an election the service provider chooses whether to increase its capacity. Investment is irreversible and profitable only with a sufficiently high price. We derive the subgame perfect equilibrium for this game and investigate the price and investment dynamics through an experiment with human subjects. The experimental results show that service providers invest when decision-makers' interests align with their own, though prices may rise inefficiently high when the regulatory framework is made independent of future political manipulation. Independency of regulation thus decreases efficiency and consumer surplus. In contrast, when decision-makers' interests do not align with service providers' we find efficiency only when regulation can be made independent from electoral dynamics.
    Keywords: Infrastructural investment, regulation, electoral competition, laboratory experiment
    JEL: L5 L43 D92 C9
    Date: 2013–03–18
  3. By: Rahmatallah Poudineh; Tooraj Jamasb
    Abstract: Following the liberalisation of the electricity industry since the early 1990s, many sector regulators have recognised the potential for cost efficiency improvement in the networks through incentive regulation aided by benchmarking and productivity analysis. This approach has often resulted in cost efficiency and quality of service improvement. However, there remains a growing concern as to whether the utilities invest sufficiently and efficiently in maintaining and modernising the networks to ensure long term reliability and also to meet future challenges of the grid. This paper analyses the relationship between investments and cost efficiency in the context of incentive regulation with ex-post regulatory treatment of investments using a panel dataset of 126 Norwegian distribution companies from 2004 to 2010. We introduce the concept of “no impact efficiency” as a revenue-neutral efficiency effect of investment under incentive regulation which makes a firm “investment efficient” in cost benchmarking practice. Also, we estimate the observed efficiency effect of investments in order to compare with no impact efficiency and discuss the implication of cost benchmarking for investment behaviour of network companies.
    Keywords: Investments, cost efficiency, incentive regulation, distribution network
    JEL: L43 L51 L94 D21 D23 D24
    Date: 2013–04–01
  4. By: Jan Abrell; Friedrich Kunz
    Abstract: In northern Europe wind energy has become a dominating renewable energy source due to natural conditions and national support schemes. However, the uncertainty about wind generation affects existing network infrastructure and power production planning of generators and cannot not be fully diminished by wind forecasts. In this paper we develop a stochastic electricity market model to analyze the impact of uncertain wind generation on the different electricity markets as well as network congestion management. Stochastic programming techniques are used to incorporate uncertain wind generation. The technical characteristics of transporting electrical energy as well as power plants are explicitly taken into account. The consecutive clearing of the electricity markets is incorporated by a rolling planning procedure reflecting the market regime of European markets. The model is applied to the German electricity system covering an exemplary week. Three different cases of considering uncertain wind generation are analyzed. The results reveal that the flexibility of the generation dispatch is increased either by using more flexible generation technologies or by flexibilizing the generation pattern of rather inflexible technologies.
    Keywords: Electricity, Unit Commitment, Stochasticity, Renewable Energy
    JEL: C61 D41 L94
    Date: 2013
  5. By: AGRELL, Per (Université catholique de Louvain, CORE & Louvain School of Management, Belgium); NIKNAZAR, Pooria (Université catholique de Louvain, LSM, Belgium)
    Abstract: Benchmarking methods, primarily non-parametric techniques such as Data Envelopment Analysis, have become well-established and informative tools for economic regulation, in particular in energy infrastructure regulation. The axiomatic features of the non-parametric methods correspond closely to the procedural and economic criteria for good practice network regulation. However, critique has been voiced against the robustness of best-practice regulation in presence of uncertainty regarding model specification, data definition and collection. This paper investigates the foundation of the critique both conceptually and by describing the actual state-of-the-art used in energy network regulation using frontier analysis models in Sweden (2000-2003) and in Germany (2007-). A principal component of the applied frontier regulation is the systematic use of outlier detection models to define homogeneous reference sets and to exclude maverick reports. We review two families of outlier detection methods in terms of their function and application using a data set from Swedish electricity distribution, illustrating the different types of outliers. Finally, the paper concludes on the role of outlier detection as a mean to implement regulation with higher robustness.
    Keywords: regulation, energy networks, outlier detection
    Date: 2013–04–26
  6. By: Pere Mir-Artigues
    Abstract: The RES-E promotion policy in Spain gave priority to the photovoltaic (henceforth, PV) ground-mounted installations. For years, the coupling of customer-side generation coupled with excess energy exports was never specifically considered. However, some months ago this option was suggested as a way to recover the Spain’s PV sector from the current moratorium on the RES-E policy. A decree draft on on-site generation was issued, its central point being the consideration of electricity exports as delayed consumption rights. But several barriers hinder its entry into force. Unfortunately, Spain could be losing an important opportunity for encouraging PV investments while retail grid parity is being reached. This working paper analyzes the different types of PV demand-side generation from the point of view of consumer-generators and evaluates the economic and technical features of the regulation proposed in Spain and to date still pending.
    Keywords: Distributed on-site generation, net metering, Spain.
    JEL: Q42 Q48
    Date: 2013–03–01
  7. By: AGRELL, Per (Université catholique de Louvain, CORE & Louvain School of Management, Belgium); BOGETOFT, Peter (Copenhagen Business School, Denmark)
    Abstract: Benchmarking methods, and in particular Data Envelopment Analysis (DEA), have become well-established and informative tools for economic regulation. DEA is now routinely used by European regulators to set reasonable revenue caps for energy transmission and distribution system operators. The application of benchmarking in regulation, however, requires specific steps in terms of data validation, model specification and outlier detection that are not systematically documented in open publications, leading to discussions about regulatory stability and economic feasibility of these techniques. In this paper, we review the modern foundations for frontier-based regulation and we discuss its actual use in several jurisdictions.
    Keywords: agency theory, regulation, energy networks
    JEL: Q40 L59 C51 C24
    Date: 2013–04–26
  8. By: GAUTIER, Axel (University of Liège, HEC Management School, Belgium & Université catholique de Louvain, CORE, Belgium); POUDOU, Jean-Christophe (LAMETA, Université de Montpellier, France)
    Abstract: The postal sector has undergone dramatic changes over the recent years under the double effect of ongoing liberalization and increased competition with alternative communication channels (e-substitution). As a result, the mail volume handled by the historical operator has declined sharply while the latter’s ability to match the same standard of universal service may be under threat. Thus, a reform of the postal universal service is on the agenda. This paper examines possible reforming options ranging from keeping universal service within the postal sector to redefining universal service as spanning postal and electronic technologies.
    Keywords: universal service, postal market, digitalization
    JEL: L51 L86 L87
    Date: 2013–05–22
  9. By: Eric Schniter (Economic Science Institute, Chapman University); Timothy Shields (Economic Science Institute, Chapman University)
    Abstract: Though individuals differ in the degree to which they are predisposed to trust or act trustworthy, we theorize that trust-based behaviors are universally determined by the calibration of conflicting short- and long-sighted behavior regulation programs, and that these programs are calibrated by emotions experienced personally and interpersonally. In this chapter we review both the main-stream and evolutionary theories of emotions that philosophers, psychologists, and behavioral economists have based their work on and which can inform our understanding of trust-based behavior regulation. The standard paradigm for understanding emotions is based on mapping their positive and negative affect valence. While Valence Models often expect that the experience of positive and negative affect is interdependent (leading to the popular use of bipolar affect scales), a multivariate “recalibrational” model based on positive, negative, interpersonal, intrapersonal, short-sighted and long-sighted dimensions predicts and recognizes more complex mixed-valence emotional states. We summarize experimental evidence that supports a model of emotionally-calibrated trust regulation and discuss implications for the use of various emotion measures. Finally, in light of these discussions we suggest future directions for the investigation of emotions and trust psychology.
    Keywords: emotion, affect valence, recalibrational theory, trust game, experiment
    Date: 2013
  10. By: Karim L. Anaya; Michael Pollitt
    Abstract: The aim of this study is to explore different practices for accelerating the integration of generating facilities to the electricity network using smart solutions. Case studies from Great Britain, Ireland and Northern Ireland and the Unites States were selected. The paper assesses and compares the different Principles of Access (POA) that have been implemented in these countries, such as Last-in First-out (LIFO), Pro Rata and Market-based. The social optimality of these approaches is also discussed. The paper also evaluates how the risk (regarding curtailment and investment) is allocated between parties (distributor network operators, generators and customers). Even though the cases are diverse, important findings and lessons have been identified which may assist UK distribution network operators to address the issue of increasing the connection of distributed generation while managing efficiently and economically energy exports from generators.
    Keywords: distributed generation, wind generation, non-firm, smart solutions
    JEL: L51 L94 Q20 Q28 Q40
    Date: 2013–05–01
  11. By: Tucker, C.E. (Tilburg University, Tilburg Law and Economics Center)
    Date: 2012

This nep-reg issue is ©2013 by Natalia Fabra. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.