Performance-based regulation

Abstract: This research considers accountability issues for new forms of regulation that shift the emphasis from prescribing actions to regulating systems or regulating for results. Shortfalls at various levels of accountability are identified from experiences with these regimes in the regulation of building and fire safety, food safety and nuclear power plant safety. These experiences illustrate how accountability shortfalls can undermine regulatory performance and introduce a potential for subtle forms of regulatory capture. These concerns underscore the importance of finding the right fit between regulatory circumstances and the design of regulatory regimes.

Abstract: This chapter provides a comprehensive overview of the theoretical and empirical literature on the regulation of natural monopolies. It covers alternative definitions of natural monopoly, public interest regulatory goals, alternative regulatory institutions, price regulation with full information, price regulation with imperfect and asymmetric information, and topics on the measurement of the effects of price and entry regulation in practice. The chapter also discusses the literature on network access and pricing to support the introduction of competition into previously regulated monopoly industries.

Abstract: A profound consequence of deregulation is the emergence of performance based rates (PBRs). PBRs are contracts that penalize and/or reward a utility based on system performance. These contracts can be based on average system reliability, or can be based on individual customer reliability. In either case, utilities are exposed to financial risk due to the uncertainty of system reliability. This paper presents a method of assessing the uncertainty of system reliability and discusses how to use this information to manage PBR risk. This method can be used to negotiate a fair PBR, to compute the expected financial impact of a PBR, and to make design decisions that maximize profits while minimizing risk.

Abstract: Regulation aims to improve the performance of individual and organizational behavior in ways that reduce social harms, whether by improving industry's environmental performance, increasing the safety of transportation systems, or reducing workplace risk. With this in mind, the phrase "performance-based regulation" might seem a bit redundant, since all regulation should aim to improve performance in ways that advance social goals. Yet regulators can direct those they govern to improve their performance in at least two basic ways. They can prescribe exactly what actions regulated entities must take to improve their performance. Or they can incorporate the regulation's goal into the language of the rule, specifying the desired level of performance and allowing those targeted by regulation to decide how to achieve that level. This second approach is the kind of regulation that is the subject of this working paper. Incorporating performance goals into regulatory standards is by no means a new idea, but in recent years there has been renewed interest in expanding the use of performance standards in a variety of areas of health, safety, and environmental regulation. In keeping with its mission of advancing research and promoting policy outreach, the Regulatory Policy Program at the John F. Kennedy School of Government convened a workshop on May 13, 2002, to see what could be learned from agencies' experiences with performance standards and to begin to identify the likely conditions for the effective use of performance standards. The workshop brought together decisionmakers from a dozen different government agencies as well as leading researchers from the fields of economics, engineering, law, and political science. The dialogue at the workshop sought to build on the experiences of different regulatory agencies that have used performance-based regulation and to clarify its advantages and disadvantages in addressing health, safety, and environmental problems. This working paper summarizes and syntheses the dialogue that emerged from the discussion, addressing the role of performance standards in the regulator's toolbox, the conditions under which performance standards can be effective, and the challenges associated with implementing performance-based regulation in practice.