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Economic Regulation Of Infrastructure

Economic Regulation Of Infrastructure
July 14
11:00 2018

Economic regulation can be viewed from an angle of ‘Market failures’, but an alternate way of looking at it is in terms of opportunity – a way of making markets work better’.

Economic regulation can be ‘govern­ment-sponsored intervention in market decisions that empowers markets to work better by promoting competitive, market-like outcomes’.

It may involve access regulation and price regulation.

Whilst economic regulation provides stream of opportunities it also poses challenges for the economic regulators. Regulators deal with complex and dif­ficult pricing and policy issues in an environment where stakeholders can hold strong, diverse positions and have opposing objectives.

In Fiji, where Fijian Competition and Consumer Commission (FCCC) shoul­ders the role of being the state’s econom­ic regulator, it is no different.

In such an environment, it is the eco­nomic regulator’s independence which distinguishes it.

Independence can give stakeholders confidence that decisions are made without the influence of vested inter­ests, non-political interference, and with the opinion of all parties.

As the regulator, FCCC while creating opportunities for others to voice their opinion must remain independent of others’ objectives and moreover be true to its own objective which is to promote competition (mainly in the areas of ac­cess, water prices, infrastructure facili­ties and electricity).

With independence comes the onus to clearly explain the reasons for decisions and to make sure processes are as trans­parent and predictable as possible.

Decisions made via economic regula­tion have a significant effect on the Fi­jian economy and community and must therefore be understood well.

Infrastructure Regulation

Infrastructure continues to play a very important role in delivering economic and social benefits and the regulatory regimes that apply are often the main interface between infrastructure own­ers and operators and the community they serve.

A robust regulatory framework is an essential feature of maximising the potential for regulated infrastructure to deliver on these economic and social outcomes.

Given the complex nature of infra­structure decisions, the institutional set­tings within which these investments take place will be a crucial determinant of their success.

Arrangements for infrastructure regu­lation face challenges such as the im­pact of rapid evolving technology and at times, disparate requirements of gov­ernment policy makers, investors, infra­structure managers and consumers.

These challenges are common to many countries and across different regulated industries.

Objectives of the Economic

Regulation of Infrastructure

Internationally the objectives of eco­nomic regulators of infrastructure tends to include one or more of the standard economic objectives of achiev­ing economic efficiency, encouraging in­vestment, promoting competition, miti­gating monopoly power, allowing cost recovery and protecting the interests of consumers.

In some cases, regulators are also re­quired to consider broader social, envi­ronmental and industry development objectives in making their regulatory decisions.

Many of the standard economic ob­jectives should be consistent with the overall objective of achieving economic efficiency as in many cases it may be possible for an economic regulator to align these objectives in practice.

However, there might be a conflict, for instance between a regulatory decision designed to encourage long-term invest­ment and one to promote the interest of consumers which may have a much shorter time prospect.

For FCCC as a regulator of electricity and telecommunication infrastructure these two objectives are arguably made more compatible by the legislative objec­tives, which refer to promoting efficient investment in infrastructure and the long-term interests of consumers.

Whilst it’s desirable for economic in­frastructure regulatory frameworks to have the achievement of economic ef­ficiency as a central aim, this is not to suggest that other issues should not be considered.

For instance, low-income consumers may not be able to afford significant price rises which may be required to un­derpin new investments and may need additional protection or assistance.

The question then is whether this should be a decision for the economic infrastructure regulator?

Standard economic theory supports the view that policy objectives relating to issues such as social equity, environ­mental protections and industry devel­opment are more properly delivered through appropriate, transparent and accountable mechanisms, than embed­ded in economic regulatory decisions.

Challenges for Infrastructure

Regulation

These challenges give rise to questions such as:

  • Why do we regulate?
  • Are current regulatory regimes capable of dealing with rapidly changing technology and new areas of potentially contestable economic activity or are they po­tentially stifling innovation and competition?
  • What is the interplay between a body as economic regulator, a consumer-protection agency and an industry/market enforcement agency, and are these roles com­patible?
  • How can regulatory frameworks deliver on competing objectives via processes which are timely and efficient but thorough, re­sponsive to, and inclusive of consumer needs, predictable and open to review?
  • What is the role of the regulator in the investment decision gov­ernance framework and what is it that investors need from the regulatory regime?
  • How do we measure the effective­ness of our decisions and impact on infrastructure provision?

 

This is an evolving area of thought and practice and involves consideration and active participation in the stakeholder consultations, not just by regulators but by Governments, regulated industries, consumers as well as independent re­search and advisory bodies.

Over the years, substantial effort has been put into designing and implement­ing infrastructure regulatory regimes that address community needs and con­cerns, meet policy-makers’ objectives and provide the right incentives for in­vestment and efficient use of resources and concerns.

However, the evolving nature of con­sumer preferences, policy objectives and markets highlight the enduring dilem­ma for regulators – the need to balance the competing demands of processes and decisions.

Feedback: maraia.vula@fijisun.com.fj

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