The Role of the Policy Framework for the Effectiveness of Benchmarking in Regulatory Proceedings

Abstract

Regulation is an information problem. In this paper we show that benchmarking can have an important role to play in extracting information and providing efficiency incentives. However, the effectiveness of this role depends both on the credibility of the regulator to undertake a comparative efficiency analysis, and the impact of the benchmarking on the value of the firm. These are both affected by the policy framework within which the regulator operates. In Britain the regulator is not obliged to undertake any benchmarking, and the impact of the benchmarking that has been undertaken has been relatively low. These conditions have the effect of diminishing incentives for both information provision by the companies and model developments by the regulator. In the Netherlands, the impact on business value is high because benchmarking sets the price differentials from which a yardstick competition model – required by law – is implemented. These twin conditions of high credibility and high impact on value both sharpen incentives for the businesses to reveal information at the time of the benchmarking and also provide a stimulus for the regulator to properly account for firm-specific effects. In Austria, where similar conditions to the Netherlands have been established, we described the regulator's attempts to improve the robustness of the cost drivers in the model.

Incorporating Service Quality into Yardstick Regulation: An Application to the Peru Water Sector

“…Burn et al (2006) review the information revelation incentives for electricity utilities and the use of benchmarking in setting electricity distribution prices in Austria, the Netherlands, and Britain. 2 Giannakis et al (2005) and Estache et al (2004) applied similar techniques to the electricity and railway industries, respectively.…”

Regulatory management practices in OECD countries

“…2 In some instances the natural monopoly elements still exist such as in electricity distribution, which is why governance matters. The importance for effective regulatory institutions to facilitate the effective and fair operation of the market in network sectors is critical (Berg, 2000) in terms of investment (Jarvis and Sovacool, 2011), performance monitoring (Jenkins et al, 2007) and ultimately outcomes of the sector (Gutierrez, 2003;OECD 2015a).…”