Regulation of monopoly businesses
The first regulatory function is the regulation of networks. These are the elements of the electric power supply chain which currently retain elements of a natural monopoly. The network regulator thus regulates access, pricing, connection, and service quality for transmission and distribution.
For transmission, this means open access, and for both transmission and distribution, this means a clear definition of expectations for network operators, including potential penalties for failure to meet established standards. In terms of price regulation, regulators in unbundled markets focus on efficiency targets and incentives, in addition to an understanding of underlying costs.
Regulation of competitive markets
The skill sets needed to regulate networks are very different from those required to regulate the commodity side of the electricity business.
Regulation of competitive markets is less about costs and more about price. Specifically, for competitive segments, this process involves “writing the rules of the game” and creating “referees” who are able to identify, fairly try, and if proven, penalize inappropriate behavior. To achieve this, regulators need to be clear about how they define competitive pricing, and how they will address deviations from it. Competition regulation may also include a market surveillance function, so that competition regulators have the ability to identify anomalous trading patterns and investigate and explain them.
