Successes and Failures in Regulating and Deregulating Utilities

Successes and Failures in Regulating and Deregulating Utilities

Evidence from the UK, Europe and the USA

Edited by Colin Robinson

This book is the latest annual review of utility regulation and deregulation, published in association with the Institute of Economic Affairs and the London Business School

Chapter 8: Can regulation address the investment problem? Examples from aviation

Doug Andrew

Subjects: economics and finance, competition policy, public finance, public sector economics


Doug Andrew INTRODUCTION1 Simon Cowan in his excellent review paper2 on the principles of economic regulation concluded with the observation that it is not clear that price cap regulation provides the optimal incentives for investment in utilities. He goes on to note that developing robust mechanisms for investment without encouraging gold-plating (excessive costs) will be important. This will be the central focus of this chapter, but first some context. Aviation is often regarded as the first of the major regulatory reforms in Western economies, starting with the USA in the 1970s. Europe and others followed in the 1980s. The benefits are seen to be substantial. Steven Morrison and Cliff Winstonʼs recent work estimates a 27 per cent reduction in airfares due to deregulation.3 It also emphasizes the benefits of competition or the threat thereof. The benefits to European travellers from deregulation has become more recently apparent with the rapid growth of the ʻlow frillsʼ carriers, commencing in the UK perhaps as a result of its more commercial airline market. It is important to emphasize that the USA started from a private commercial airline industry. The infrastructure was and substantially is state-owned, either local or federal government. In the UK and on the European continent, there were high levels of state ownership of airlines. Regulatory reform and privatization were linked. In the UK, airline deregulation and the privatization of British Airways (BA) were closely linked, although BA continued (and continues) to have substantial advantages from highly restrictive bilateral international agreements....

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