Experience with Regulation of Network Quality in Italy, the UK and The Netherlands

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Virendra Ajodhia, Konstantin Petrov, Gian Carlo Scarsi, Bart Franken

Both theory and practice suggest that incentive price regulation, without additional quality measures, eventually leads to quality degradation: the strong cost reduction incentives (driven by the profit incentive) have the perverse effect of inducing sub-standard quality levels. Thus, under economic regulation models using incentive schemes, quality regulation becomes imperative.

This paper describes experience in Italy, the Netherlands and the UK with regulation of network quality. It shows that regulation could influence network quality significantly using different types of regulation. Starting with indirect instruments like the publication of reliability statistics, Regulators proceed with introducing standards and attached penalties, e.g. in case a power interruption takes longer than a predefined threshold, the customer facing the interruption receives a payment. Finally, incentive schemes are introduced. Incentive schemes compare measured network quality and targets. In case the network companies fail to meet their targets they are penalised. In contrary, when they exceed their targets they are rewarded. We show that, especially in Italy, network quality improved significantly, after the incentive schemes were introduced. However, the limited information about relations between costs and quality, and about customer preferences, strongly affects the effectiveness of such quality incentive schemes. Designing a method to properly compare companies and translate this into an integrated price and quality regulation system is a challenge that still lies ahead.

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