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International Handbook on the Economics of Energy

Edited by Joanne Evans and Lester C. Hunt

As an essential component for economic growth, energy has a significant impact on the global economy. The need to meet growing energy demand has prompted cutting-edge innovation in clean technology in an attempt to realise environmental and cost objectives, whilst ensuring the security of energy supply. This Handbook offers a comprehensive review of the economics of energy, including contributions from a distinguished array of international specialists. It provides a thorough discussion of the major research issues in this topical field of economics.
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Chapter 21: Incentive Regulation of Energy Networks

Thomas Weyman-Jones


Thomas Weyman-Jones 1 Introduction Incentive regulation commonly based on price or revenue capping has become widely used by European, US, Latin American and Australian network regulators as part of their regulatory regimes. This has gone hand in hand with the wide adoption of comparative efficiency and productivity analysis, more commonly known as ‘benchmarking’. Another regulatory tool is that of sliding scale regulation; which is used when the regulator is not only unable to observe effort, but is also unsure of the firm’s productive potential. This chapter sets out the key regulatory principles and tools employed when regulating energy networks. Section 3 discusses the virtues of competition and regulation. Regulatory models and their implementation are set out in Sections 4 to 9. Section 10 presents partial and general equilibrium analysis, while Section 11 concludes. The chapter proceeds with an outline of the characteristics of regulated energy networks in Section 2. 2 Characteristics of Regulated Energy Networks Regulatory issues in energy network industries, for example, electricity and gas, are illustrated in Table 21.1, showing the types of firm or organisation which may be involved in the overall supply of the fuel product and the associated customer services. In network industries the two principal activities are production and delivery through the network of wires or pipes. In electricity, for example, production is represented by generation, and electricity is delivered through a transmission (high-voltage) network and Table 21.1 Network industry structures Model 2: Partly liberalised competitive companies & regulated IOUs without access Production: several competitive...

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