Incentive regulation

Past review

The QCA undertook research on how different forms of regulation affect the incentives for firms to pursue economic efficiency.

All forms of regulation are likely to impact on incentives but the term ‘incentive regulation’ has evolved to describe a form of regulation that attempts to address two key problems with economic regulation: (i) the incentive for a regulated firm to hide its true cost profile; and (ii) the lack of incentive for the regulated firm to operate and invest efficiently.

This project investigates the conceptual framework of incentive regulation and experience with its implementation in other jurisdictions.

On 26 September 2014 the QCA released the discussion paper Incentive Regulation: theory and practice along with a research paper prepared in conjunction with the QCA staff by Professor Flavio Menezes of the University of Queensland.

The discussion paper explains the conceptual framework of incentive regulation, its motivation and how it has been implemented by regulators in Australia and the United Kingdom.  In particular, the paper investigates a form of incentive regulation known as ‘menu regulation’ that has been implemented in the United Kingdom.

Stakeholders were invited to comment on the discussion paper. We received two submissions.

The project is now closed. The QCA may rely on aspects of this analysis from time to time to inform its views on certain matters.

Traditionally, regulators have applied price cap regulation to provide incentives for regulated firms to be cost efficient.  Regulators undertake efficiency assessments of regulated firms’ costs using a range of techniques such as benchmarking and bottom-up analysis to deal with the issue of inflated cost forecasts.  Recently, menu regulation has been developed and implemented to improve incentives for regulated firms to reveal their efficient costs as well as to operate more efficiently. 

This project investigates the conceptual framework of incentive regulation and reviews its implementation by Australian and international regulators.