Energy Planning and Policy Program

Questions: 1. Why is it sometimes argued that under rate of return regulation, capital will tend to beoverutilized, and labour - underutilized?2. Please define the meaning of following concepts in the context of regulating electricitymonopoly networks?a) Asymmetry of Informationb) Regulatory Capturec) Regulatory Burden 3.Develop a philosophical perspective on the appropriateness of Rate-of-Return (Costplus)and Incentive-based (CPI-X type) regulation for regulating electricitytransmission networks. Answers: 1. Under the rate of return regulation, recommendations to have capital over utilized is common due to the following various reasons.Increased capital leads to increase of money supply. The increase of capital will be connected with the increase of investments, which are likely to yield returns. Therefore, through the over utilization of capital, more money supply is achieved in an economy and the economic growth is achieved.It has direct connection with the economy. Over utilization of capital helps to build the economy. The economy is enhanced on both social, economic and financial sector. The overutilization of capital ensures that the money is on circulation and therefore able to loft the economy. Recommendations for the underutilization are also recommendation because of various reasons. The labor is an expense, which is likely to lead to underdevelopment. Underutilization can be carried out in an economy in order to control the expense and ensure that the economy is managed (Bureau of Labor Statistics 2014). The control of the strength of currency. The labor dictates the amount of currency in supply. Underutilizing labor will lead to little currency is in supply to the economy. This can be used as a measure to ensure that appreciation of the currency to the required level is achieved. 2. Asymmetry of information the asymmetry of information applies to the monopoly businesses such as electricity distributors where they get different contracts to estimate the cost of their products for proper supply to the consumers without overburdening the consumer and generating losses. Regulatory capture in the electricity monopoly businesses, there is a body with the mandate to ensure that the consumers are not overburdened (Adams et al. 2007). Failure for the body to represent the interest of the consumers and diverting its mandate to political and individual interests is what is known as regulatory capture. Regulatory burden these are policies are regulations which are thought to be reducing the time and money for the industry to grow. The regulatory burdens may hinder the increase of the investment in an industry due to the increase of the costs of paying for the regulatory policies. 3. The rate of return in the regulation of electricity industry helps to understand the risks and reward. It helps to define the amount of investment to be set up and the benefits to different parties. In addition, the rate of return helps to control the overall price for the benefit of the consumer and the provider. It analyzes the measures to be taken to ensure that the costs are manageable in the case of the provider and can be paid by the consumer on the other end. Incentives helps to reduce the cost of running the electricity transmission and placing rules on the provider on regions to place their transmission lines (Philips 1993). The provided incentives to the electricity transmission will have conditions on the areas, which need to be operated. The incentive based also helps to control the overall costs of installing the transmission lines for both the consumer and producer. Therefore, the incentive based ensures that the industry is regulated on the amount they have to charge the consumer. References Adams, G., Hayes, S., Weierter, S., and Boyd, J. (October 2007). Regulatory Capture: Managing the Risk ICE Australia, International Conference and Events. Bureau of Labor Statistics (November 2014). The increased Supply of Underutilized Labor. Monthly Labor Review. Philips, C., F., (1993). The Regulation of Public Utilities: Theory and Practice, Arlington, VA: Utilities Report, Inc.