Regulation of network charges

Abstract

This chapter indicates that we seem at present to be facing a paradigm shift in network regulation, from pure price-based approaches to hybrid models with cost-based elements. The driver behind this move is the need for adequate network investment. Price-based approaches, such as price or revenue caps, designed to increase incentives for short-run efficiency improvements, are successful. However, it appears that when timely and adequate long-run investment is the policy aim (which is not the same as efficient investment), cost-based approaches are more effective than price-based regulation. One of the more prominent examples of a sophisticated hybrid form is the introduction of an 'incentive mechanism' with a menu of sliding scales for the promotion of investment in the electricity distribution networks in the UK in 2005. This appears to be a promising way forward. © 2009 Springer-Verlag Berlin Heidelberg.