Regulatory economics

We have significant experience in advising firms in the electricity, gas, manufacturing, and maritime industries on a range of matters related to economic regulation. We have provided independent expert opinions on matters relating to the determination of gas, electricity, and port tariffs for both the regulated entities and downstream users of regulated products and services.  When disputes between consumers, regulated firms and regulators arise – we offer rigorous analysis of complex industry and market dynamics and independent expert advice.

What is economic regulation?

Economic regulation refers to a system of price and/or market access control measures that governments choose to impose on firms that face limited competition or that produce negative externalities (e.g. pollution). The main aim of modern economic regulation is to enable markets to work more effectively. In a market where it is little or no competition, the purpose of regulation is to try and incentivise firms to produce and allocate goods or services almost as efficiently as if they operated in a competitive environment.  In other cases, economic regulation may be required to correct market prices that do accurately reflect the economic or social costs of producing a good, for example, if production results in environmental degradation.

Economic regulation is usually implemented through a system of incentives and/or penalties. When well-designed and effectively implemented, regulation can motivate firm and consumers to adjust their behaviour in a way that leaves society and the environment better off (or at least better off than it would have been in the absence of regulation).

What are some of the pitfalls of regulation?

However, to ensure effective design and implementation, regulators must also be independent, competent, and benevolent and have the technical capacity to promote the public interest. If a regulator implements poorly designed regulation or makes ill-considered decisions or it is unduly influenced by narrow political or commercial interests, it can have disastrous consequences. Poor regulatory decisions, for example, may jeopardise the financial sustainability of a national utility and result in electricity or water shortages.

When regulation operates well, both companies and customers benefit. But designing and implementing regulation that is effective, easy-to-administer and that will produce the desired behaviour change, requires a deep understanding of the industry and market dynamics, and complex economic and behavioural principles.