ABSTRACT

Multiyear rate plans are a more widespread form of performance-based regulation. They typically are practiced by US-style utility regulators and rarely are applied to natural infrastructure monopolies. This chapter discusses the regulation of natural monopolies as promoted by the European approach. It examines the three dominant ways of regulating this price: cost-plus (cost+) regulation, price-cap regulation, and various kinds of incentive regulation. Cost+ regulation, also called rate-of-return regulation, is the most widespread form of regulating natural monopolies, at least in continental Europe. Benchmarking regulation, also sometimes called yardstick regulation, is yet another type of incentive regulation. Price-cap regulation has many advantages as compared to cost+ regulation: most importantly, price-cap regulation is easy and cheap to administer. Performance-based regulation, sometimes also called output regulation, basically ties retail prices – that is, the prices the infrastructure owner can charge to its users – to the achievement of particular objectives, set by the regulator.