Towards a Single Energy Market
Edited by Jean-Michel Glachant and François Lévêque
95 Europe primarily relies on conduct regulation involving economic incentive mechanisms (price-cap, revenue-cap, rate of return models, and so on). The main guiding principle in the design of conduct regulatory mechanisms is the creation of a system of incentives rewarding eﬃciency and aﬀecting the economic conduct of the regulated entities. What distinguishes these mechanisms is the regulatory eﬀort required to implement them and the strength of the incentives for costs economy, which are inherent in the diﬀerent mechanisms. The traditional rate of return involving a form of cost-plus regulation can be considered as the least desirable of these mechanisms since it embodies micro-management from the regulators’ side and, in addition, creates weak incentives for costs economy. On the other end of this spectrum is the pure price-cap regulation, which involves capping the prices charged by the regulated entity, who is allowed to increase prices in line with some general price index minus a factor X so that its customers have guaranteed prices that fall by X in real terms over time. In between these two extremes there is a ﬂora of mechanisms, the socalled ‘performance-based mechanisms’ that can be speciﬁed to ensure eﬃciency. There are various alternatives for the formulation of performance-based mechanisms, which may diﬀer in accordance with factors such as the target variable that is capped (price and/or revenues), the duration of the scheme, variables that are used in determining the target values, and. However, irrespective of the formulation and structure...
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