Regulating Electricity Distribution Utilities

  • Maria Kopsakangas-Savolainen
  • Rauli Svento
Part of the Green Energy and Technology book series (GREEN)


In this chapter we compare the welfare effects of different regulation schemes of electricity distribution utilities. The compared regulation schemes are Fixed Price regulation, Cost of Service regulation, Menu of Cost-Contingent Contracts, and Simple Menu of Contracts. In our calculations we utilize the information of a firm’s potential to improve cost efficiency. The firm-specific cost information of Finnish electricity distribution utilities is obtained by using various Stochastic Frontier models presented in earlier chapters of this book. Our basic result is that welfare can be improved by changing the Cost of Service regulation scheme to the Menu of Contracts regulation. Welfare also increases in the case of Fixed Price regulation and Simple Menu of Contract regulation. There is, however, a significant difference among regulation regimes on how this improved welfare is distributed to consumers and producers.


Regulation Scheme Service Regulation Stochastic Frontier Analysis Random Effect Contract Regulation 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


  1. 1.
    Armstrong M, Cowan S, Vickers J (1994) Regulatory reform: economic analysis and British experience. MIT Press, CambridgeGoogle Scholar
  2. 2.
    Armstrong M, Sappington DEM (2004) Toward a synthesis of models of regulatory policy design with limited information. J Regul Econ 26:5–21CrossRefGoogle Scholar
  3. 3.
    Armstrong M, Sappington DEM (2007) Recent developments in the theory of regulation. In: Armstrong M, Porter R (eds) Handbook of industrial organization, vol 3, pp 1557–1700Google Scholar
  4. 4.
    Andersson B, Damsgaard N (1999) Residential electricity use—demand estimations using Swedish micro data. In: Paper presented at the 22nd IAEE annual international conference, Rome, 9–12 JuneGoogle Scholar
  5. 5.
    Bower AG (1993) Procurement policy and contracting efficiency. Int Econ Rev 34:873–901MATHCrossRefGoogle Scholar
  6. 6.
    Chu LY, Sappington DEM (2009) Procurement contracts: theory vs practice. Int J Ind Organ 27:51–59CrossRefGoogle Scholar
  7. 7.
    Gasmi F, Laffont J–J, Sharkey WW (1999) Empirical evaluation of regulatory regimes in local telecommunications markets. J Econ Manage Strategy 8:61–94CrossRefGoogle Scholar
  8. 8.
    Jamasb T, Pollitt M (2001) Benchmarking and regulation: international electricity experience. Util Policy 9:107–130Google Scholar
  9. 9.
    Joskow P (2008) Incentive regulation and its application to electricity networks. Rev Network Econ 7:547–560Google Scholar
  10. 10.
    Kopsakangas-Savolainen M, Svento R (2010) Comparing welfare effects of different regulation schemes: an application to the electricity distribution industry. Energy Policy 38:7370–7399CrossRefGoogle Scholar
  11. 11.
    Laffont J–J, Tirole J (1986) Using cost observation to regulate firms. J Political Econ 94:614–641CrossRefGoogle Scholar
  12. 12.
    Laffont J–J, Tirole J (1993) A theory of incentives in regulation and procurement. MIT Press, CambridgeGoogle Scholar
  13. 13.
    Laffont J–J (1994) The new economics of regulation ten years after. Econometrica 62:507–537MATHCrossRefGoogle Scholar
  14. 14.
    Liston C (1993) Price-cap versus rate-of-return regulation. J Regul Econ 5:25–48CrossRefGoogle Scholar
  15. 15.
    Littlechild SC (1983) Regulation of British telecommunications’ profitability. Her majesty’s stationery office. Report to the Secretary of State, Department of Industry, LondonGoogle Scholar
  16. 16.
    Pint EM (1992) Price-cap versus rate-of-return regulation in a stochastic-cost model. RAND J Econ 23:564–578CrossRefGoogle Scholar
  17. 17.
    Reichelstein S (1992) Constructing incentive schemes for government contracts. An application of agency theory. Acc Rev 67:712–731Google Scholar
  18. 18.
    Rogerson WP (2003) Simple menus of contracts in cost-based procurement and regulation. Am Econ Rev 93:919–926CrossRefGoogle Scholar
  19. 19.
    Sappington DEM, Weisman DL (1996) Designing incentive regulations for the telecommunications industry. AEI Press, Washington Google Scholar
  20. 20.
    Törmä H (1985) Industrial demand for energy in Finland 1960–1982. Discussion paper no. 9, University of Jyväskylä, FinlandGoogle Scholar
  21. 21.
    Willner JA (1996) Comment on bradburd: privatisation of natural monopolies. Rev Ind Organ 11:869–882CrossRefGoogle Scholar

Copyright information

© Springer-Verlag London 2012

Authors and Affiliations

  • Maria Kopsakangas-Savolainen
    • 1
  • Rauli Svento
    • 2
  1. 1.Finnish Environment Institute and Thule Institute, University of OuluMartinniemiFinland
  2. 2.Department of EconomicsMartti Ahtisaari Institute of Global Business and Economics, University of OuluOuluFinland

Personalised recommendations