Tuesday, December 27, 2016
The end of an exceptional period in regulation?
Jon Stern has published a nice working paper comparing developments in the economic history of network infrastructure industries with recent developments in the regulation of braodband/communications and energy in the United Kingdom. Regulation of network industries in the UK, since the privatization experience of the Thatcher period, has been characterized by a focus on efficiency and the more or less declared goal of replacing regulation with competition as soon as this was possible. However, for most of the history of network industry regulation since the beginning of railways regulation, this was motivated by distributional and affordability concerns. In the UK, the desire to expand the information revolution to everybody and the combination of increasing fuel prices, climate change concerns and the economic crisis since 2008 has produced an environment where focusing regulation only on efficiency concerns has proven increasingly difficult. Many economists were enthusiastic about this exceptional period of a single-minded focus on efficiency, not because they thought that distributional concerns were not important, but because they thought that these concerns could be better addressed by other instruments such as taxation and social security. For some reason, traditional economists love separation arguments. But sometimes separation is difficult. After all, taxation is a multi-goal activity itself, and more often than not, it does not achieve satisfactory distributional goals due to a concern for efficiency or because of informational, macroeconomic or other reasons. An additional reason that makes separation difficult in regulated industries is the demonstrated importance of behavioral biases by consumers, which introduce difficulties in the introduction of competition for retail consumers, difficulties that cannot be easily overcome with transfers. Something Jon Stern does not address in his paper, and which perhaps can be a path for future research, is the impact of the increased concern for distribution on the evolution of the institution of independent regulation itself. After all, the accountability of an independent regulator, and its rationale, are faciltated by the fact that the regulator is supposed to be single-mindedly pursuing efficiency, and not other objectives for which insulation from a democratic political process is perhaps less justified. Distributional concerns may actually not only undermine at least partially the status of the independent regulator, but also of other regulatory institutions that prevail in other countries. Writing this from Chile (the country that with the UK started the privatization movement in the 1980s), here the lower chamber of Parliament just approved (by unanimity) a resolution proposing to change the structure of the panel of experts that arbitrates disputes in the water sector, among other measures trying to put downward pressure on the tariffs of water and sanitation companies. Although the package has still to go through the upper chamber (the Senate) and the executive has expressed its disagreement with the lower chamber, the stock price of the water incumbent company went down by 14% on the day of the vote.