Effective regulation operates by setting a framework of incentives that allows an industry to achieve ongoing efficiency gains from innovation, balancing these long-term interests with more immediate regulatory objectives.
Thus, the real benefits of regulation are gained by focusing on the processes by which resources are allocated in the industry, rather by seeking to replace a market outcome by an outcome determined by a regulator.
We analyse these processes and incentives on a case-by-case basis. Although economic theory offers some general guidance on how regulation (such as access prices) should be set in order to achieve efficient outcomes, these theories are frequently undermined by their narrow focus on immediate price or volume effects. To be useful, the analysis must examine wider impact of regulation on incentives, and thereby on the conduct of market participants and on overall outcomes.
We avoid this risk by gathering sufficient information about market and institutional processes to identify the relevant decision points in an industry. We use the analysis of these "levers" to assess how commercial or regulatory instruments may be used to achieve the desired objectives.
As well as access agreements, charging structures and contract design, we have particular experience of the design of utility-style price controls and the incentives that they give rise to, particularly with respect to investment and the balancing of pressures on operating expenditure, capital expenditure and quality of service.