The Essential DNA of Electricity Regulation

We examine the key features of utility regulation, with an eye towards what should be kept and what can be discarded in electricity market reforms. Enterprises are considered public utilities if they are monopolistic and perform an essential public function. Governments create independent regulatory agencies to address two fundamental problems in the control of public utilities, namely the dampening effect that politics has on investment and the value of specialized knowledge. Agencies are more effective in stimulating investment if they are insulated from political pressures to behave opportunistically and if they have sufficient resources to overcome information asymmetries with operators.