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Infrastructure regulation: Lessons from Australia ’ s experience

Infrastructure regulation: Lessons from Australia ’ s experience. Stephen P King Monash University. What have we learnt?. What have we learnt?. First point: Good regulation is hard. The regulator ’ s dilemma. The regulator ’ s dilemma.

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Infrastructure regulation: Lessons from Australia ’ s experience

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  1. Infrastructure regulation: Lessons from Australia’s experience • Stephen P King • Monash University

  2. What have we learnt?

  3. What have we learnt? First point: Good regulation is hard

  4. The regulator’s dilemma

  5. The regulator’s dilemma Most infrastructure that is regulated provides inputs to other sectors

  6. The regulator’s dilemma Most infrastructure that is regulated provides inputs to other sectors

  7. The regulator’s dilemma Most infrastructure that is regulated provides inputs to other sectors

  8. The regulator’s dilemma Most infrastructure that is regulated provides inputs to other sectors

  9. The regulator’s dilemma Most infrastructure that is regulated provides inputs to other sectors

  10. The regulator’s dilemma Most infrastructure that is regulated provides inputs to other sectors

  11. The regulator’s dilemma Most infrastructure that is regulated provides inputs to other sectors

  12. The regulator’s dilemma Most infrastructure that is regulated provides inputs to other sectors

  13. The regulator’s dilemma Regulated firm

  14. The regulator’s dilemma Competitive sector Regulated firm

  15. The regulator’s dilemma Competitive sector Regulated firm End users

  16. The regulator’s dilemma Competitive sector Regulated firm Economic Efficiency Objectives End users

  17. The regulator’s dilemma Competitive sector Regulated firm End users Stay in business

  18. The regulator’s dilemma Competitive sector Regulated firm End users Stay in business Appropriate investments

  19. The regulator’s dilemma Competitive sector Regulated firm End users Minimize costs Stay in business Appropriate investments

  20. The regulator’s dilemma Competitive sector Regulated firm End users Minimize costs Stay in business Efficient pricing Appropriate investments

  21. The regulator’s dilemma Competitive sector Regulated firm End users Appropriate use of input Minimize costs Stay in business Efficient pricing Appropriate investments

  22. The regulator’s dilemma Competitive sector Regulated firm End users Appropriate use of input Appropriate downstream configuration Minimize costs Stay in business Efficient pricing Appropriate investments

  23. The regulator’s dilemma Competitive sector Regulated firm End users Appropriate use of input Appropriate downstream configuration Minimize costs Stay in business Efficient pricing Appropriate investments Impossible!

  24. The third-best solution Competitive sector Regulated firm End users

  25. The third-best solution Competitive sector Regulated firm End users Let the competitive sector look after itself

  26. The third-best solution Competitive sector Regulated firm End users Make sure the regulated firm doesn’t go bankrupt

  27. The third-best solution Competitive sector Regulated firm End users And give it some incentives (perhaps)

  28. The third-best solution Competitive sector Regulated firm End users Building block regulation

  29. What have we learnt? First point: Good regulation is hard - and this is why we use building block regulation

  30. What have we learnt? Second point: The regulator's objective

  31. The humble regulator

  32. The humble regulator Should the objective be to maximize the Long Term Interest of End Users?

  33. The humble regulator Should the objective be to maximize the Long Term Interest of End Users? No! Insufficient information

  34. The humble regulator Should the objective be to maximize economic efficiency?

  35. The humble regulator Should the objective be to maximize economic efficiency? No! Insufficient information

  36. The humble regulator What can the regulator do?

  37. The humble regulator What can the regulator do? Get out of the way if competition will do an adequate job.

  38. The humble regulator What can the regulator do? Get out of the way if competition will do an adequate job. If competition is clearly inappropriate, minimal conservative regulation.

  39. The humble regulator What can the regulator do? Get out of the way if competition will do an adequate job. If competition is clearly inappropriate, minimal conservative regulation. Try and work out how to do make yourself redundant

  40. What have we learnt? Second point: The regulator's objective should be to promote competition either directly through market rules or indirectly through the conservative, transparent regulation of natural monopoly services

  41. What have we learnt? Third point: The regulator's primary tool.

  42. The regulator’s task

  43. The regulator’s task Set the revenue that will flow to the regulated business.

  44. The regulator’s task Set the revenue that will flow to the regulated business. Risk allocation/incentives

  45. The regulator’s task Risk is endogenous to the regulatory decision.

  46. The regulator’s task Risk is endogenous to the regulatory decision. The regulated firm should only bear risks it can manage (idiosyncratic risk)

  47. The regulator’s task Risk is endogenous to the regulatory decision. The regulated firm should not bear systematic risk

  48. The regulator’s task Risk is endogenous to the regulatory decision. So the Asset Beta should be very low.

  49. What have we learnt? Third point: The regulator's primary tool is ex ante risk allocation.

  50. What have we learnt? Fourth point: Privatization.

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