Research Update

December 2014

Tap into our research:
Next Practices: PURC is helping policymakers and infrastructure executives throughout the world stay on the cutting-edge of knowledge while the regulatory landscape continues to change.

The listing below illustrates the range of topics addressed in the new working papers and publications posted since the last Research Update.

What are the considerations for developing and implementing sound environmental policy?

It is difficult to identify and quantify the damage caused by pollution on human health or inflicted upon sensitive ecosystems, so determining the benefits and costs of remediation policies is often extremely difficult. Policy-makers respond to domestic political pressures by devising institutions and instruments to address pollution and environmental sustainability. Cost-benefit analysis (CBA) and cost-effective analysis provide frameworks for systematically identifying and evaluating abatement strategies that avoid potential inefficiencies or inequities.

What can the US learn from the EU’s Energy Efficiency Policies?

The chapter compares the approaches of the United States and the European Union toward energy regulation and governance. It explores the question of what the US can learn from the EU’s experiences in developing and implementing energy efficiency policies in the area of electricity generation and use. A larger question is whether an initiative dependent upon the combined efforts of separate jurisdictions to meet a collective goal can effectively address an issue as complex as energy efficiency. Localized interests may be less of a priority or conflict with broader federal interests. Conversely, national or international policies may thwart localized policies.

How can regulators be successful in an environment in which they are required to be an implementer of policies established by others and be, at the same time, someone providing leadership to effect change?

In this paper we examine the implications of utility regulators serving these two potentially conflicting roles. We explain that the regulator’s success will depend upon his/her ability to properly perform each role at its appropriate time, to manage the pressures that these roles bring to the regulatory system, and to limit how the roles sometimes work at cross purposes.

How can utilities deal with an aging workforce?

This article examines the situation and suggests that the looming retirements are both a challenge and an opportunity. On one hand, companies can lose expertise. However, the new generation of workers will create a new kind of utility that fits emerging markets and the new ways of working in the 21st Century.

How can energy storage developments evolve with regulatory uncertainty present?

This Article begins the complex dialogue that must take place to address the emerging technologies providing energy storage for our electricity grid. Energy storage has the capacity to be a game-changer for many facets of our grid, providing better integration of renewable energy, enhanced reliability, and reduced use of carbon-intensive fuels. Energy storage faces a number of obstacles, however, including technological, financial, and regulatory uncertainty. This Article focuses on the regulatory uncertainty, and defends the proposition that not all regulatory uncertainty is created equal. It argues for differential treatment of this uncertainty, depending on its context, scope, and source, and applies this framework to the uncertainty surrounding the classification of energy storage. It finds that this uncertainty operates against high baseline levels of uncertainty in the energy industry, is limited in its scope, and is intentionally embraced by the federal regulators in an effort to realize the benefits of regulatory uncertainty. This Article asserts that this form of uncertainty is one that can be managed in a way to avoid stifling the development of this important technology. This Article sets forth strategies for regulators and regulated entities to continue to function, even within this zone of regulatory uncertainty.

Do customers save on energy with high-efficiency technology?

This paper seeks to estimate the energy savings effect of a Demand-Side Management program, specifically Gainesville Regional Utility's (GRU) high-efficiency central Air Conditioner(AC) rebate program in which GRU offers incentives to its customers to replace their old, low-efficiency AC unit with a high-efficiency model. We used a difference-in-difference coarsened exact matching approach to reduce the imbalance of pre-treatment characteristics between treated and control households and also to control for the effects of weather on electricity consumption. We found substantial annual energy savings of the high-efficiency AC program. We disaggregated the effects into summer-peak effects, winter-peak effects, and non-peak months effects. The results indicate that the summer-peak effects were substantial and statistically significant while there were no statistically significant effects of the program on winter-peak demand. Also, by following program participants over a three-year period, we find that there is no statistically significant rebound effect of the high-efficiency AC rebate program.

How do incentives lead to an increase in revenue water in urban systems?

The study utilizes cross-section data from utilities of National Water and Sewerage Corporation (NWSC) of Uganda to test application of extrinsic incentive theory on non-revenue water reduction. Applying a multiple regression model, we find that the effect of level of incentive payments on revenue water (billing efficiency) depends on the amounts of staff inputs, service coverage and water supplied per connection. Accordingly, utilities with higher levels of promised incentive payments have a higher likelihood of improving their billing efficiencies, depending on the number of staff employed, level of service coverage and production per connection. The evidence also suggests that other extrinsic factors of incentive theory like coercion and threat of punishment may be useful modulators of incentive payment effects. The study creates more understanding about the use of incentive theory in the design of non-revenue water reduction plans and how corresponding incentive policies can be structured.

On Merits of Antitrust Liability in Regulated Industries

We examine the merits of imposing antitrust liability on an incumbent supplier of regulated services. Such antitrust liability can limit anticompetitive behavior by the incumbent supplier but also can distort activity in the regulated industry, including the actions of the regulator. We demonstrate how the merits of antitrust liability vary with the regulator’s objectives, instruments, and policies, and with prevailing industry conditions.

Residential willingness-to-pay for reducing coal-fired generation’s emissions in Hong Kong

In 2010 the Hong Kong government mandated a 50-60% decrease in carbon intensity by 2020, implying a 19-33% reduction of total greenhouse gas emissions from their 2005 levels. The reduction was to be achieved by increasing local natural-gas-fired generation and nuclear power imports from Southern China to displace local coal-fired generation. Our statistical analysis of the responses to a June 2013 telephone survey shows that local residents' willingness-to-pay (WTP) estimate for a 30% emissions reduction via natural-gas-fired generation is an 18% annual electricity bill increase. The WTP estimate is twice the estimate for nuclear power. Since these estimates are below the projected bill increase required to achieve the government's target, they call for a more comprehensive emissions reduction policy that would include energy efficiency investment to reduce electricity consumption, as well as clean fuel adoption and fuel efficiency improvement by the transportation sector.

Defining Relevant Markets in Revolving Evolving Industries

The US antitrust regulators have established merger guidelines to inform companies proposing mergers as to how the agency staff will conduct their analyses. This paper examines the development of the merger guidelines and discusses next steps for how the guidelines might adapt to rapidly changing sectors, like the telecommunications sector.

What characterizes municipalities that are more likely to accept government incentives to merge with other municipalities, when they both own and operate water utilities?

This study examines the characteristics of municipalities that took advantage of incentives provided by the Japanese government to consolidate in what is known as the Great Heisei Era of consolidations. We find that economies of scale and government transfers were some of the main factors leading to consolidation of government services in municipalities that own and operate water utilities. This is expected given the Central Government’s efforts to equalize public service levels, which have limited the effects of Tiebout sorting, and given the large cost savings available due to municipalities also being the sole providers of water services for these areas. Our results are consistent with the existing literature regarding the consolidation of public services and provide evidence that these effects occur outside of the traditionally examined areas of North America and Europe.

How would managers or regulators know whether a utility is high-performing?

Classifying utilities on the basis of performance is one tool for evaluating the impact of current incentives and determining factors affecting efficiency. Some elements are beyond managerial control, while others are within the managerial purview: “executives manage what they measure”. This study applies advanced quantitative techniques to show how powerful technical tools can help the analyst identify issues that warrant greater attention. The metric benchmark comparisons presented in this study do not help managers identify particular production processes that need to be improved at particular stages of production: that is the task of process benchmarking. Rather, data envelopment analysis (DEA) helps identify areas warranting further attention and provides analysts with a tool that helps “sort” utilities into various performance categories. One lesson from experiences in other nations is that citizen awareness of relative performance puts pressure on managers to reduce costs and improve service quality.

What can regulators do if utilities take on too much debt?

This paper goes into depth in principal-agent theory to develop incentive systems that encourage utilities to choose optimal capital structures.

What is the role of national or state regulators in monitoring and incentivizing state owned and municipal utilities?

Sanford Berg has been examining how one government agency (a regulator) might improve the performance of another government agency (such as an electricity or water distribution utility). The situation presents political issues, as managers might see such oversight as intrusive and unnecessary. For example, local boards often provide some oversight, and/or a Board of Directors represents citizen-taxpayers as they provide guidance to managers. Berg’s chapter in Global Water summarizes material prepared for the United Nations Economic Commission for Latin America and the Caribbean, “Best practices in regulating state-owned and municipal water utilities.” He shows that ound engineering is necessary, but not sufficient for improved utility performance. That means that governance within water utilities must be addressed (including selection of CEOs and boards of directors via non-patronage routes), just as external oversight of water utilities (sector regulators and government ministries) needs to be improved. Institutions matter — perhaps even more than money. The key lessons apply to utilities in developed and developing nations The ECLAC Report has been translated into Portuguese as well.

Why should an oil-rich country pursue a civilian nuclear power program, especially at a time when the future of nuclear-power around the world is uncertain?

The United Arab Emirates has sought to portray itself as an example for the region of how to acquire foreign nuclear assistance in a correct and transparent manner. In their recent article in Middle East Policy, Dirioz and Reimold place the UAEs' aggressive nuclear construction program in its strategic context and conclude that nuclear power addresses the UAEs' energy needs while mitigating vulnerabilities arising from the Emirates' geopolitical position.

Traditional justifications for common carrier regulation for communications networks do not apply to today’s communications networks.

The paper examines the historical development of the public utility and common carrier concepts and finds that the essential features of these constructs largely do not fit communications networks today and for the foreseeable future. More recent frameworks for economic regulation also do not fit. Communications networks are not special infrastructure because they do not exhibit zero marginal costs over an appreciable range of demand and do not exhibit a differentiating amount of social demand. Communications networks appear to satisfy the conditions for general purpose technologies, but the features of these technologies that would compel economic regulation, primarily the presence of significant externalities, are lacking.

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