The Strategic Role of State Assets – Reframing the Privatisation Debate | February 2012
Regulation 2.16 The regulatory framework and its enforcement sets the ‘rules of the game’ by which the economic actors must operate. These rules are present in some form in all markets. Appropriate regulation will not only consider economic efficiency (allocative and technical), but will also consider broader issues of equity, distribution, environment, security of supply and service, social cohesion, human rights, and a variety of other strategic economic development concerns. There may be tensions and trade-offs between these goals and this makes an appropriate regulatory regime complex to design. Changing economic context and evolving technological possibilities make appropriate regulation a constantly moving target. 2.17 Inefficiencies caused by the exploitation of a monopoly position can be ameliorated or eliminated by implementing appropriate regulatory mechanisms – at least in principle. The regulator must endeavour to minimise the cost to the rest of the economy by ensuring the monopolist cannot earn more than the normal rate of profit, and by ensuring the monopolist is operating to minimise its own internal costs. The economic goal of regulation is to simulate the conditions of competition for the enterprises to remedy the inefficiencies of monopoly. Regulation itself imposes costs (for example, administration costs for the Government and compliance costs for the firm) and these costs must be balanced against the gains from regulation. The regulator must also endeavour to avoid setting prices so low that it eliminates the commercial case for future investment. 2.18 Regulation is often not an effective means of exercising authority and can lead to the phenomenon of ‘as bad as the law allows’. 2.19 In recent years, Ireland has been characterised by failures of regulation in a number of sectors, for example in telecommunications and in financial services. Eircom’s court battles with the telecommunications regulator ComReg - which arose from Eircom’s resistance to opening up segments of its network to competition - illustrate the difficulties involved when regulating private monopolies. The rational decision of the private regulated firm will be to obstruct the regulator through whatever means possible (for example legal challenges), if the benefits of doing so outweigh the costs. If it is cheaper not to obey regulators (including the paying of fines) then the regulated firm will simply choose not to obey regulators. 2.20 The difficulties associated with regulation are compounded by the information asymmetries between monopolist and regulator, and by the dangers of regulatory capture or co-option. Regulatory capture has been a pervasive phenomenon internationally and regulatory failure/capture is accepted as one of the primary causal factors of the on-going recession in Ireland and elsewhere. To avoid these risks, there is a need for clear distance between regulator and operator. 2.21 Transparency can help minimise the risk of regulatory capture. For example regulators could be obliged to explain and justify all of their major decisions to the Oireachtas, and to release all of the non-commercially sensitive information pertinent to their regulatory decisions. Consumers’ interests should play a direct representative role in regulatory oversight. To ensure effective representation of consumer interests, the regulatory process should include quasi-judicial procedures and should be presented in an adversarial context with evidence presented by both sides and with a public advocate representing the 13