Balancing incentives in network regulation
When undertaking a price review, the regulator’s task is to decide whether the existing system is achieving its main goal: protecting consumers’ interests. This means creating the right incentives for firms to become more efficient and pass the benefits on to customers – a difficult balance to achieve, as many regulators have found.
In preparation for the next round of price reviews of transmission and distribution in both the electricity and gas sectors, Frontier Economics was commissioned by Ofgem to assess the balance of incentives in the existing system and suggest how it might be improved. The first opportunity to make such improvements is the electricity distribution review, due to come into effect in 2005.