{"id":114285,"date":"2010-09-09T16:10:00","date_gmt":"2010-09-09T16:10:00","guid":{"rendered":"https:\/\/www.mafr.fr\/actualites\/i-115-two-regulations-2\/"},"modified":"2026-08-21T10:55:50","modified_gmt":"2026-08-21T10:55:50","slug":"i-115-two-regulations","status":"publish","type":"post","link":"https:\/\/www.mafr.fr\/en\/jorc\/jorc-review\/jorc-review-archives\/i-115-two-regulations\/","title":{"rendered":"I-1.15 : Two regulations ?"},"content":{"rendered":"
\n\tThe word "regulation" is fashionable, and so is what it is supposed to refer to; but the notion actually refers to many different situations, which can be a source of confusion. Of course, regulation is all about improving market functioning; but we also have to admit that the measures that regulation must take to accomplish this are not the same in situations where competition malfunctions, as opposed to situations where there is no competition at all.
\n\tBut, there must be a preliminary agreement on the goals that regulation must pursue. Specifically, is competition an end in itself, or simply a way to best cause economic actors to unwittingly pursue the public good?
\n\tI venture to suggest that we cannot usefully speak about regulation without defining what it is intended to accomplish…<\/span><\/span><\/span><\/strong><\/em><\/div>\n
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\n\tThanks to scientific progress, mankind has escaped from the natural equilibria that used to regulate his species' population through famine and illness, and has prospered remarkably. Great is the temptation to think that what worked in physics, chemistry, and medicine, will also work in economics: here, again, mankind should have to escape from the natural equilibrium of markets by replacing it with mindful and organized planning. But, the fundamental conclusions of Pareto, Allais, Debreu, and Arrow show that perfect planning will never do better than perfect competition. In practice, perfect competition does not exist any more than perfect planning does. But, since we must resign ourselves to the imperfect, competition has proven to be greatly superior to planning; especially if we take the examples of the USSR, North Korea, or Havana. The reasons for this are obvious. In real-world competition, there remains a system of price, albeit imperfect, to inform choices and to cause improvement. In imperfect planning, there are no indicators of error, except for involuntary imbalances between supply and demand, and there is nothing that informs better choices.<\/span><\/span><\/span><\/div>\n
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\n\tClearly, as a means of steering the economy, imperfect competition is greatly superior to imperfect planning – and practically the whole world has by now become convinced of this truth[1]<\/a>. The problem for governments is no longer how to manage the entire economy, but rather, to create conditions that allow competition (and the free-market mechanisms that accompany it) to function as optimally as possible, wherever it can be effective. <\/span><\/span><\/span><\/div>\n
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\n\tHowever, the first thing to be done is to identify the various types of imperfections in market economies, which can be divided into a few broad categories: firstly, 'natural monopolies', which preclude competition; the effects of dominance and cartels which distort competition; 'transaction costs' that can lead competition astray, etc…, on the other hand, the excessive income disparities that result from the natural distribution of talent in a situation of perfect competition, and a fortiori, when these disparities are engendered by imperfect competition in which actors wrongfully manipulate the system's imperfections to their advantage. <\/span><\/span><\/span><\/div>\n
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\n\tWe will not discuss all of the items comprising the systematic study of a competitive system's imperfections, and will only briefly mention those that require the intervention of a regulator[2]<\/a>.<\/span><\/span><\/div>\n
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\n\tIt must be noted at the outset that there exist cases where competition is inherently impossible, because of the existence of 'natural monopolies': it is so expensive to simultaneously operate two competing energy grids in the same territory, that very soon, we observe that both networks spontaneously merge. This precludes competition from regulating the price of use of these networks, and obliges public authorities to step in in order to provide a substitute for market mechanisms in one way or another. <\/span><\/span><\/span><\/div>\n
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\n\tIn other cases, competition is possible, but functions improperly, for a great number of reasons. In such cases, competition must be forsaken – which means we return to the category of natural monopolies – or strengthened, by making the necessary arrangements so that the market works better.<\/span><\/span><\/div>\n
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\n\tReplacing the market or improving the way it functions, are two totally different tasks. They are, however, designated by the same word – regulation – which is quite regrettable. For, the qualifications and skills of each type of regulator are not at all the same. The regulator whose task is to replace market mechanisms must, first and foremost, know all there is to know about the monopolist in order to be able to set retail prices (or the scale of tariffs) at a suitable level. In situations where, on the contrary, it is the market's role to reveal the equilibrium price at which supply will meet demand, the regulator's role is not to 'go into the kitchens to see how the sauce is made', but rather, to ensure that competitors do not cheat. In this situation, the regulator monitors compliance with the rules of the game, and fleshes them out when appropriate; in the former situation, the regulator guides the player’s hand.<\/span><\/span><\/div>\n
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\n\tIn the interest of clarity, let us give each function a different name. Let us call the regulator whose role is to make sure that competition survives and functions as efficiently as possible the 'market regulator'. And let us call 'price regulator' the one who, in the absence of competition, is responsible for setting the prices of the services it monitors.<\/span><\/span><\/div>\n
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\n\tIn order to be a good market regulator, the person appointed must have a thorough understanding of market mechanisms, must understand the turpitude that arises on the market when supervision is relaxed, and must have the necessary strength to withstand the various pressures to which he may be subjected.<\/span><\/span><\/div>\n
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\n\tA good price regulator, on the contrary, does not need to become versed in the market's ways, since he supervises a sector where competition does not exist. On the other hand, he must be thoroughly familiar with the techniques and costs of the company he regulates in order to be capable of autonomously <\/i>fixing the prices he is responsible for at the suitable level. This is a daunting task, and is almost impossible when performed from outside the company. Indeed, how is it possible to have enough, completely trustworthy, information to set price scales that can be, by nature, extremely complex?<\/span><\/span><\/div>\n
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\n\tIt is this fundamental difficulty that has led newcomers to the free-market system to risk reducing the amount of natural monopolies (or their equivalents) where competition is excluded, to the strict minimum.<\/span><\/span><\/div>\n
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\n\tIn the electricity market, a strange arrangement has become the norm, and this is particularly salient in France: this market was liberalized in order to drive down prices, as per the instructions of reputable treatises on political economy, but today we must face the facts: EDF's prices must now be allowed to rise significantly in order to come into line with those practiced on the European market[3]<\/a> and allow for competition with corporations who supply themselves on this market. Because it would be too unpopular, such an alignment with the prices practiced on the European market is currently being rejected by the French Parliament!<\/span><\/span><\/span><\/div>\n
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\n\tNobody contests that electricity transmission and distribution, as well as such ancillary tasks as metering and meter-reading, are a natural monopoly. Therefore, the State, or a regulator appointed by the State, must set the prices for these monopolistic activities (which often represent half of the cost of electricity supply). But, how can interconnection services, transmission services, and distribution services be intelligently billed? This is not an easy task from within the company. From outside the company, the only possibility is to resort to using simplified pricing schemes that have a limited ability to best inform users' choices. After all, we must not forget that in a market economy, the role of price is to inform choices, and in this case, especially to avoid wasting costly and rare transmission and interconnection capacity.<\/span><\/span><\/span><\/div>\n
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\n\tOn the other hand, even though it might not be very beneficial, it would be easy to put power plants into competition with one another on a market. The 'dispatcher', who continues to authoritatively balance supply and demand at all times, formerly did this using his continuous knowledge of the state of the networks and of the fuel costs at every power plant in the system. Today, he uses the costs declared<\/i> by power plants, whether they be truthful or not. But, he is not vicious enough to pretend to be unaware of the state of interconnection networks: instead of calling on the plant that has the best price at any particular instant in time, but which would necessitate using a saturated network that could cause a system-wide blackout, he chooses to favor the public interest over the strict respect of the order of priority resulting from reported costs. Furthermore, as concerns extreme and unpredictable peaks in demand, no electricity producer is currently ready to invest in production facilities whose probability of use (after we have exhausted all the possibilities of inciting clients to "intelligently" consume) is hardly more than a few winter days, one out of every ten or twenty years. Therefore, in this situation, once again, a public Authority must assume this responsibility. In France, this was formerly EDF. <\/span><\/span><\/span><\/div>\n
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\n\tTherefore, forcing competition upon an integrated electric company, such as EDF, has no evident economic benefit. Of course, in countries where monopolistic management was disastrous for the company, or ruinous for clients, there was no other solution but to implement competition, even if this solution is often nothing more than a stopgap measure. But in places where the service was cheap, and popular with clients, and required no government subsidies, was it really necessary to force such an ill-suited model upon the electricity sector? Especially since issue was not taken with the principle of regulation, but rather, with its implementation…<\/span><\/span><\/span><\/div>\n
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\n\tIndeed, as we have noted that it is extremely difficult to regulate energy prices from outside the company<\/i>, the President of EDF was formerly the true price regulator of the French electricity market, under the supervision of a Board comprised of one-third of users' representatives, one-third of staff representatives, and one-third of State representatives. And the government was there as a last resort, to approve or disapprove the company's pricing policy.<\/span><\/span><\/span><\/div>\n
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\n\tThe system worked well. EDF is currently worth a few hundred billion euros on the stock market (less if we use today's fixed electricity prices, and more if we use the average European prices), without its only shareholder, the State, having invested a penny: everything was done through loans or by using cash-flow. Although it is true that the company benefited from a State guarantee on its repayment capacity (which, briefly, at first was legal guarantee, and later, became a de facto guarantee), subtle State levies cost the company dearly. But, what is important, is that this result was obtained with price levels that – except for the very largest customers, which are special cases – were amongst Europe's lowest (excluding tax). <\/span><\/span><\/span><\/div>\n
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\n\tTherefore, when dealing with "price regulation" rather than "market regulation", making the president of the company the price regulator has advantages that should not be underestimated. An external regulator, as dedicated and selfless as he may be[4]<\/a>, will never have enough information at his disposal, and we can expect to see the size of his team grow exponentially in order to try to carry out an almost impossible mission.<\/span><\/span><\/span><\/div>\n
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\n\tOf course, this solution is not applicable in all contexts. It implies the existence of traditions, and "a culture of public service" which are unequally present in the world's various countries. But, at least, it deserves mention, if only to understand its limitations.<\/span><\/span><\/span><\/div>\n
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\n\tMarket regulator, price regulator … Is there any chance that this nuance in vocabulary, which signifies an essential vocational distinction, will be recognized in the regulatory literature? This would be to the advantage of clarity, and we would avoid interminable debates between experts who are simply not speaking about the same thing!<\/span><\/span><\/div>\n
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\n\tThat said, it is clear that the "market regulator" cannot be one of the competitors. However, when competition is impossible (or is limited to a few little birds pecking at the elephant's back for the greater good of all), making the president of the company the "price regulator" as part of his public interest mission is one of the possible solutions. This is a simple closing remark to illustrate the importance of vocabulary in the study of regulation…<\/span><\/span><\/span><\/div>\n
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\n\t\t\t[1]<\/span><\/span><\/span><\/a>              That having been said, if the partisans of market economy continue to accumulate stupider and stupider excesses, confusing liberalism and 'laissez-faire', they risk having to undergo <\/span>—<\/span> for not too long, I hope — a restorative cure of authoritarian economic planning.<\/font><\/font><\/div>\n<\/p><\/div>\n
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\n\t\t\t[2]<\/span><\/span><\/span><\/a>              We will therefore not discuss the concession system, or 'public service contracts', which are only really efficient when used for the provision of relatively simple services, such as the management of buses, prisons, etc.<\/span><\/font><\/div>\n<\/p><\/div>\n
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\n\t\t\t[3]<\/span><\/span><\/span><\/a>              We don't have go to great lengths to understand this situation! EDF has never received any subsidies from the French government, which underhandedly obliged it to repay generouly the de facto guarantee on its loan capacity.<\/span><\/font><\/div>\n<\/p><\/div>\n
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\n\t\t\t[4]<\/span><\/span><\/span><\/a>              If, in addition, he is a good manager, isn't it simpler to make him the manager of the company? Why would he immediately cease to be selfless?<\/span><\/font><\/div>\n<\/p><\/div>\n<\/div>\n
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