Price regulation in Australia: how consistent has it been?

Abstract

We assembled a database consisting of fifty two regulatory decisions, involving two hundred and fifty four annual observations, made by seven different regulators and across five different industries. For each of these observations we construct a variable that represents the proportion of the firms’ cost claims that were disallowed by the regulator when determining the maximum revenue. We then attempt to explain this fraction by using categorical variables representing the regulator, the industry and the time period. Our empirical results suggest that we can explain fifty per cent of the variance in the sample by using these simple categorical variables. Moreover, our results suggest that despite the differences in the implementation of price regulation across regulated industries and across jurisdictions in Australia, outcomes are surprisingly consistent. For example, we show that it is not possible to reject the hypothesis that the regulatory outcomes in South Australia, New South Wales, the Australian Capital Territory and Victoria are similar. In the same vein, we observe that regulatory outcomes in transmission (electricity and gas) are similar to each other and so are the outcomes in distribution (electricity and gas). We also find that the nature of ownership of regulated firms (private vs. public) has little impact on the proportion of disallowed cost claims.