A

Administrative Procedure Act - The creation of regulatory agencies in the US has been a matter of controversy. One particular aspect of the criticism was their alleged breach of the principles of the separation of powers. When it became clear in the 1930s that the regulatory agencies are spreading attention shifted to the procedures by which they made their decisions (in one sense this was just the continuation of the previous political battle by other means). It was decided that the procedures of the agencies needed to be regularized and this produced the Administrative Procedure Act of 1946.

The Act, which was titled the "constitution of the American administrative state" have four basic purposes:
1. To require agencies to keep the public informed of their organization, procedures, and rules
2. To provide for public participation in the rule-making process; 3. To provide uniform standards for the conduct of formal rule-making and adjudicatory proceedings; 4. To restate the law of judicial review.

Two points are important to note: Firstly, the Act covers all agencies and authorities, with limited exceptions, of the federal government (most state have their own similar acts). Secondly, the Act's procedural provisions have remained substantially unmended since its enactment (Cosmo and Prosser, 1991 220-1)

Anti-trust laws - Legislation to control monopoly and other market-based restrictive practice in order promote competition. It applies not only to the amalgamations of firms (that is, trust) but also for restrictive practices of single companies. The Antitrust legislation originated, in its modern form in the United States. The Sherman Act (1980) made monopoly or the restraint of trade illegal. The Clyaton Act (1914) clarified earlier legislation and prohibited specific activities. Anti-trust policy is over seen by the Federal Trade Commission (FTC), a federal government agency created in 1914 which cooperates with, but is independent of, the Anti-Trust Division of the Department of Justice (Bannock et. al, 1992, 15).

Asymmetrical Regulation

Averch-Johnson effect - Harvey Averch and Leland Johnson published in 1962 a critique on the system of rate of return ("cost plus") regulation. In a paper they published they suggested that profit-motivated firms under regime of rate of return regulation have interest to maximize their costs in order to maximize returns. This is the basic problem of rate-of-return regulation that led to the promotion of different forms of incentive regulation. See Averch, Harvey and Johnson, Leland, "Behavior of the Firm Under Regulatory Constraints", American Economic Review, 1962, Vol 52, pp. 1053-1069.

Avoided Costs - A regulatory term for the amount of money that an electric utility would need to spend for the next increment of electric generation that it instead buys from "new independent producer of electricity" (Smellof and Asmus, 1997,209).

B

Barriers to entry - Economic, political or technical factors which prevent or make it difficult for firms to enter a market and compete with existing suppliers.

Bounded rationality - The suggestions that political, economic and social agents may not have the cognitive power to maximize their political, economic and social benefits. While they intend to be rational, they actually are not so.

C

Capture Theory ("Regulatory Capture)" - The theory that ineffectiveness of regulatory agencies could most plausible be explained by assuming that they had been subverted by pressure, influence, and "bribery" to protect the interests of the regulated. According to one-well known version, agencies typically undergo a "life-cycle" in response to the political environment. When established, an agency attracts public attention and acts with vigour; when that attention is transferred to other subjects, public support is lacking and the agency becomes vulnerable to domination by the regulated interests. There are various methods of influencing agency: the information required by the agency may be obtainable only from the regulated industries; lack of expertise in the subject-matter may mean that the agency has to recruit its officials from those industries; and the industries may threaten the agency with costly, or even trivial, time-wasting appeals should it fail to be "co-operative".

Cartel - An association of producers to regulate prices by restricting output and competition. Cartels are illegal under many anti-trust laws. Some governments however promotes cartels for various reasons, notably, promoting export (Bannock et al., 1992, 62).

Collusion - Cooperation between independent firms so as to modify competition. Collusion may be tacit or explicit and may involve fixing prices.(Bannock et al., 1992, 74).

Competition policy - The name given to any set of government measures aiming to stimulate competition and protect consumers against MONOPOLIES and CARTELS. The areas of such policy include (a) control of dominant firms by regulation; (b) control of mergers to prevent industries becoming monopolized, and (c)control of anti-competitive acts, such as full-line forcing and predatory pricing (Bannock et. al, 1992, 80).

Compliance Costs - "Expenditure of time or money in conforming with government requirements. The compliance cost of income tax will include the cost of record-keeping, payments to an accountant, etc. Compliance costs are additional to the costs of collection, which are borne by the government and may be lesser or greater than compliance costs. The compliance costs. The compliance costs of REGULATION include the payment of licence fees for permission to trade and, for example, the cost of fire-proof door installed to comply with fire regulations" (Bannock et al., 1992, 81).

Contestable Markets (Theory) - government regulation of a natural monopolies may not be necessary, if there is no need for significant "sunk" investments to enter the industry. With low entry barriers, the market becomes contestable in the sense that higher prices may attract the entry of new competitors. See, Baumol, W., Panzer, J. and Willig, D., Contestable Markets and the Theory of Industrial Structure, New York, Harcourt Brace Jovanovich, 1982.

Contracting Out - The practice by governments or firms of employing an outside agent to perform some specific task rather than perform it themselves, that is to say to buy rather than to make. The practice is defended on the grounds that it stimulates competition between companies for contracts to provide services which might otherwise be run less efficiently in-house.(Bannock et al., 1992, 88).

Convergence - The tendency of societies/states/regimes to grow more alike, to develop similarities in structures, processes and performances (Kerr, 1983, 3).

Cost benefit analysis - The appraisal of an investment project which includes all social and financial cots and benefits accruing to the project (including such issues such as reduction in road accident or loss of an area of outstanding natural beauty).

Cost plus - A method of setting a price in which the contractor charges the actual cost of the goods he suppliers or the work he carries out plus either a percentage or or an agreed absolute amount for his services. Used for some government contracts, the cost-plus formula provides no incentives for the contractor to keep his costs to the minimum, and where the percentage service charge is applied, he actually has an incentive to inflate them. The justification for the cost-plus system is that for certain kinds of work, e.g., development contracts in large technical projects, it is not possible to estimate costs in advance (Bannock et. al., 1992, 93).

Cream-skimming - In de-regulated industries, where entry is free, a competitive firms has an incentive to concentrate on those areas of the market where, for geographical or other reasons, the costs of supply are lowest. The effect of deregulation, in such a case, render it increasingly less profitable to supply the poorer and thinner areas of the market and services in such areas will suffer.

Cross-Subsidies - Transfer of revenue or costs from one area or part of the business to another. Such action can serve to equalize prices across the country (revenue in the center subsidize services in the periphery, so as to achieve one uniform national tariffs).

D

Decoupling - A regulatory design that breaks the link between utility revenues and energy sales. This design is intended to align utility shareholders interests with rate-payer and societal interests.

Delegation -

Demand Side management - The methods used to manage energy demand including energy efficiency, local management, fuel substitution, and load building (Smeloff and Asmus, 1997, 211).

Deregulation -

Discretion (regulatory) -

Duopoly - Two sellers only of a good or service in a market.

E

Economies of Scale - Factors which cause the average cost of producing a commodity to fall as output of the commodity rises (Bannock et al., 1992, 130).

Economies of Scope - Factors which make it cheaper to produce a range of related products than to produce each of the individual products on their own (Bannock et al., 1992, 131).

Economic Regulation -

Exclusive dealing - A 'tie" under which a retailer or wholesaler contracts to purchase from a supplier on the understanding that no other distributor will be appointed or receive suppliers in a given area. Exclusive dealing may be illegal under competition laws. yet it can be defended on grounds of benefits to the consumer, such as after-sales service.

Externality - Any cost or benefit not accounted for in the price of goods or services.

F

Federal Energy Regulatory Commission (FERC) - An independent federal commission that has jurisdiction over energy producers that sell or transport fuels for resale in interstate commerce. See its web-site

G

H

Horizontal Integration - (see also vertical integration)

I

Incentive Regulation

Information Regulation - Type of social regulation that deals with the flow of information in a market. Information regulation falls into two broad categories: mandatory disclosure and the control of misleading information. In the first category suppliers are obliged to provide information relating to price, identity, composition, quantity, or quality. In the second they are required to supply reliable information (Ogus, 1994, 121).

Interconnection -

J

L

Legislation (Primary and Secondary)

M

N

Natural Monopoly - Industry is categorized as a natural monopoly when products or services can be supplied most economically by one firm. Such an industry is characterized by high fixed costs combined with low marginal costs.

O

P

Predatory pricing - Setting prices at very low levels with the objective of weakening or eliminating competitors or to keep out new entrants to a market. Since prices will be raised again once these objectives have been achieved, there is no permanent benefit to the consumer. Predatory pricing is a means of establishing or maintaining monopoly power Bannock et al., 1992, 335).

Principal-agent problem - The problem that arises in many spheres of activity, when one persons, the principal, hires an agent to perform tasks on his behalf but cannot ensure that the agent performs them in exactly the way the principal would like. the efforts of the agent are impossible or expensive to monitor and the incentives of the agent differ from those of the principal. Examples of the problem include the management of assets on behalf of investors; the management of companies on behalf of shareholders by executives; and the running of public services by private firms under regulation by government authorities. The principal-agent relationships are characterized by asymmetric information (Bannock et al., 1992, 340).

Privatization - Principally, the sale of government owned equity in nationalized industries or other commercial enterprises to private investors, with or without the loss of government control in these organizations (Bannock et al., 1992, 341-2).

Price-Cap Regulation - In price cap regulation - the regulator sets the prices rather than the profits of the regulated. This suppose to give the regulated company an incentive to become more efficient by enabling it to keep its efficiency gains. At one of its popular forms the price cap formula is set to PRI-X . The price cap is a number of percentage points (X) below the standard rate of inflation as measured in the retail price index (PRI).

The advantages of the choice of price cap regulation over the traditional American U.S-style rate-of-return regulation is a matter for debate in the field of regulation policy.

Procedural Legitimacy of Regulation - "Procedural legitimacy implies, among other things, that the agencies are created by democratically enacted statues which define the agencies' legal authority and objectives; that the regulators are appointed by elected officials; that regulatory decision making follows formal rules, which often require public participation; that agency decision must be justified and are open to judicial review" (Majone, 1996, 291). See also substantive legitimacy, Administrative Procedure Act

Public goods - Commodities of which the consumption has to be decided by society as a whole, rather than by each individual. Public goods have three characteristics. The first is that they yield non-rivalrous consumption: one person's use of them does not deprive others from using them. The second is that they are non-excludable - if one person consumes them it is impossible to restrict others from consuming them: public television is non-excludable, although if devices are made for scrambling television pictures, except to those who own picture- decoding cards, television becomes an excludable service. Thirdly, public goods are often non-rejectable - individuals cannot abstain from their consumption even if they want to. National defense is a public good of this sort, although television is not. Non-excludability and non-rejectability mean that no market can exist and provision must be made by government, financed by taxation. Many items are partly public and partly private goods. A developed patent system, for example, has public-good properties, benefiting not only the community as a whole, but especially inventors who take out patents(Bannock et al., 1992, 350).

Public Utilities - An industry supplying basic public services to the market and possibly enjoying monopoly power. Usually, electricity, gas, telephones, postal services, water supply and rail and often other forms of transport are regarded as public utilities. These services all require specialized capital equipment and elaborate organization (Bannock et al., 1992, 351).

R

Rate of Return Regulation - A form of regulation, common for public utilities in the US, under which firms are not allowed to earn above a certain rate of return. Under such a regime, price rises are capped to levels at which the target rate of return will be earned. This price will invariably be lower than the price which a profit-maximizing monopolists would charge (Bannock et al., 1992, 360).

Re-regulation -

"Red tape" -

Regulatory Agency -

Regulatory Balance -

Regulatory lag - The delay between technological, economic and political change and the response of the regulators. For example, Utilities can benefit from higher rates because regulatory bodies generally base future rates on costs incurred in an earlier "test period". Since costs tended to decline, utilities usually benefited from reduced costs before new rates were established.

Rent Seeking Theory - (1) In regulated environment, private business will find it easier to invest in politics than in improving their economic competitiveness. By protecting themselves from competitive pressures by political means they ensure their rents (stable profits). From the society's point of view, such an activity divert resources from the economic arena to the political arena. (2) behavior which improves the welfare of some one at the expense of the welfare of someone else.

S

Self-Regulation - Regulation by delegation of responsibilities to private or semi-private bodies. It is widely common among the crafts and the professions and more recently it has extended into other areas such as technical standardization, industrial safety and financial services.

Advantages of self-regulation:
1. Self regulatory organization can normally command a greater degree of expertise and technical knowledge of practices within the relevant area than a public agency.
2. Rules issues by a private body are less formalized than those of public regulatory regimes. This informality reduces the cost of rule-making, facilitates quick adaptation of the rules to new technical knowledge and changing economic conditions, and permits more flexible enforcement.
3. Administrative costs of self regulation are normally internalized in the trade or activity which is subject to regulation, while the cost of public agencies are typically borne by the taxpayers.

Problems of self-regulation:
1. There is a risk of capture of the regulators by the regulated interests. [see also the capture theory]
2. Monitoring the day-to-day activity and general policies of self regulatory body is problematic not the least because self regulation was institutionalized for the first place due to the high expertise in the area. A possible solution is a two-tier system where a public agency acts chiefly as a regulator of regulators, with the self regulatory agency handling day-to-day rule-making and supervision. (Majone, 1996, 23-26)

Sherman Antitrust Act -

Social-Regulation

Stranded Costs -

Substantive Legitimacy of Regulation - "relates to such features as policy consistency, the expertise and problem-solving capacity of the regulators, their ability to protect diffuse interests and, most important, the precision of the limits within which regulators are expected to operate" (Majone, 1996, 291). See also procedural legitimacy, Administrative Procedure Act

Subsidiarity - The notion that political authority should vest in the most local jurisdiction possible. Under Subsidiarity, problems that affect only a town should be decided by the town, those that extend beyond the town should be decided by the county, and those that extend beyond the two should be decided by the county, should be handled nationally. The twin precepts of Subsidiarity are that everyone who is affected by an issue should be in the jurisdiction with responsibility for it; and that as a few people as possible not affected by an issue should be in the jurisdiction responsible for it (Bannock et al., 1992, 410).

Sunk Costs - costs incurred in the past which are irretrievable and therefore not relevant to current decisions. For example, a small bakery might buy an over at a fixed cost, but which it could sell at some future date should it want to. It also might pay out a large amount in advertising its services. However, this latter cost could not be recovered later on - once paid for, the advertising has gone, whether or not the promotion is successful. Sunk costs represent a barrier to entry in an industry because they scare potential entrants from entering - should they fail, they would have wasted all the sunk costs (Bannock et al., 1992, 412).

T

Take-over - the acquisition of one company by another. Take-overs are sometimes financed by paying cash at an offer price but also by exchange of shares. The term take-over is normally used to imply that the acquisition is made on the initiative of the acquirer and often without the full agreement of the acquired company.

Transperancy

U

Universal Service -

Utility - see public utility

V

Vertical Integration - Concentration of control (and/or ownership) over various phases of production or supply under a single entity. In electricity, for example, this means that a single entity controls generation, transmission and distribution (see also horizontal integration).

Vertical restraints - Restrictions or conditions imposed on the seller or buyer of an item. Common restraints are resale price maintenance and tie-in sales. They are usually either structured to extend a natural monopoly in one market to a more competitive market or they designed to affect the retail conditions in which a product is sold. Competition authorities have been concerned to limit the application of these restrictions, although more recently it has been argued that in most cases vertical restraints are as much against the producer's interest as the public interest where they are against the public interest at all (Bannock et al., 1992, 441-2).

W

World Trade Organization -

Y

Yardstick regulation - When markets are divided between regional monopolies the regulators may use the performances of the best performing monopolies to set a general performance target (such as prices and tariffs). Another formulation of the meaning of yardstick regulation is that of Franklin D. Roosevelt who justified the establishment of government owned electricity enterprises arguing that their performances may serve as a yardstick for the regulation of private electricity companies.

Sources:

Bannock, Graham et al., The Penguin Dictionary of Economics, London, fifth edition, 1992.

Cosmo Graham and Prosser Tony, Privatizing Public Enterprises: Constitutions, the State, and Regulation in Comparative Perspective, Clarendon Press, Oxford, 1991.

Kerr Clark, The Future of Industrial Societies: Convergence or Continuing Diversity?, Cambridge, Harvard University Press, 1983.

Majone Giandomenci, Regulating Europe, Routledge, London, 1996.

Ogus Anthony, regulation: Legal Form and Economic Theory, Clarendon Press, 1994.

Smelloff Ed and Asmus Peter, Reinventing Electric utilities, Safe Energy Communication Council, Island Press, Washington, 1997.

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