Integrated price and reliability regulation: the European experience

The need to establish new frameworks for regulating the unbundled network functions in the restructured ESI and the dissatisfaction with traditional regulation systems has led regulators to adopt schemes such as price- and revenue-caps. These schemes provide strong incentives for efficiency thus making inclusion of quality (and particularly reliability) regulation elements imperative. European regulators have recognized this as all of the systems studied in this paper (England and Wales, Italy, The Netherlands, Norway, Portugal and Spain) have one or more regulation instruments for reliability in place. There are however differences in the type and structure of instruments. An integrated price and quality system based on yardstick competition can overcome informational problems that regulators face. Due to perceived difficulties, this is not yet used by any of the regulators. Designing such a system is a challenge that still lies ahead.