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Role of regulators and regulation in a (typical) restructured electricity industry - page 6 / 21

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The Italian Authority for Electricity and Gas – September 20036

Monopoly regulation/2

On price cap regulation, at least three issues must be emphasized:

1.

When designing a price cap, the regulator must carefully consider the bundle of goods and services to be covered by the cap:

If the bundle is poorly designed, then the regulation may be subject to potential anticompetitive abuse. However, if the price cap provides too little flexibility to firms, then opportunities to rebalance prices for both consumer and firm gain will be limited

3.

The regulator needs to carefully design the review process:

Where possible, information used in a price cap review needs to be beyond the control of the regulated firm. If reviews are based on realised profits, then the price cap may degenerate to standard rate-of-return regulation

Regulatory credibility is crucial to the success of the price cap:

Methodology setting of X-factor level is of crucial importance

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