Updating Price Controls: Rationale and Practicalities
18 June 1998
By Graham Shuttleworth
This paper was commissioned by the Office of Regulator General, Melbourne (ORG) in 1998. ORG wanted a reasonsed response to two papers submitted to them in the course of the regulatory review of price caps for electricity distribution businesses in Victoria, Australia. Both papers had been submitted by supporters of a "light-handed" approach, who maintained that the ORG would be exceeding its mandate if it enquired into the costs incurred by the distribution businesses. The paper by Crews suggested that regulation of networks was unnecessary or socially undesirable. The paper by Laurits Christensen Associates maintained that price caps should be set by reference to a "benchmark" drawn from information about costs in other companies. The NERA response first sets out the rationale for regulation of electricity distribution businesses, and then explains why it is necessary and legitimate to set price caps by reference to a distribution company's actual costs.
