Price, quality and regulation: An analysis of price-capping and the reliability of electricity supply

Robert Fraser

    Research output: Contribution to journalArticlepeer-review

    13 Citations (Scopus)

    Abstract

    This paper examines the relationship between price cap regulation and the reliability of supply of a private monopoly. Two situations are considered: one in which reliability is excluded from the price cap; and one in which it is included. If reliability is excluded, it is shown that there is a tendency for the firm to protect profits by lowering reliability when cost increases must be absorbed, whereas if reliability is included then this tendency is eliminated. However, this inclusion creates an incentive for the firm to exploit the positive relationship between price and reliability when cost increases can be passed on. But this problem can be controlled by reducing the exogenous weight applied to reliability in the price cap formula.
    Original languageEnglish
    Pages (from-to)175-183
    JournalEnergy Economics
    Volume16
    DOIs
    Publication statusPublished - 1994

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