Regulating Networks in Decline

Abstract

Demand for some services provided on traditional postal, electricity, gas and fixed telecommunications networks can be characterized as being in decline in some jurisdictions. Declining demand can give rise to difficult questions for regulators, in particular, the extent to which network operators can fully recover the costs of historic investments, and the efficiency and distributional effects of applying different rate structures. It can also raise fundamental questions about: the on-going rationale for regulation; the essential functions provided by network operators; and whether regulations should be applied symmetrically to traditional and alternative suppliers. Depending on the pace and scale of the decline, regulation may need to adapt. Proposals for adapting regulation are identified and critically examined in this paper, particularly in terms of the approach to setting the allowed level of revenues and the determination of rate structures.

Keywords: Public utility, Networks Declining demand, Excess capacity, Economic regulation, Rate structures, Sunk cost recovery

JEL Classification: K23, L5, L43, L51, L97