REGULATORY ARRANGEMENTS IN UK AND FINLAND
In the 1990s, the electricity industry experienced considerable changes all around the world as it undergo various restructuring such as regulation of monopoly networks and privatisation of state-owned utilties. Although regulators objectives differ across the globe, the underlying aim of these reforms remains the same; to protect consumer welfare. The electric market is mostly monopolistic in nature and it consists of four primary processes: generation, transmission, distribution and retail (Liston, 1993). Restructuring in the form of deregulation processes are mainly According to aimed at improving efficiencies of the network industries.
Viljainen & Partanen (2005), Competition has proven to be an efficient way of realizing the potential efficiency gains in electricity generation and selling where as electricity transmission and distribution have remained regulated natural monopolies. This paper will focus on regulation for electricity distribution sector, which still remains monopolistic in many countries. We will now look at two approaches of regulatory arrangements for electricity; the top down approach practiced by the UK, the RPI-X-price capping model and bottom-up rate of return regulation practiced in Finland. The RPI X price cap regulation was first developed in the United Kingdom in the 1980s to be the regulatory framework for the country’s newly privatized utilities. The basic idea behind formation of this regulation is to close in on the problems associated with asymmetric information between regulators
and the operators. By adopting price cap regulation and allowing utilities to keep for a period of time profits they received by improving efficiency, the government believed the companies would reveal their efficiency capabilities. In turn this would allow the regulator to eventually set regulated prices that reflected the operators (Jamison, 2005) Under the UK price cap regulation,...