Foreword: The Market versus Regulation

From its beginnings in Chile and the UK in the 1980s, electricity reform has spread almost throughout the world, especially in the more developed countries. The objective has generally been to increase efficiency, reduce costs, and improve quality of service. The reforms have varied in extent and scope and detail but in general they have sought to achieve this objective by relying less on public enterprise and regulated monopoly, and more on market mechanisms such as private ownership and competition. With up to two decades of experience now in hand, discussion has increasingly gone beyond theory to look at practice. Many books and papers have analyzed experience in individual countries, especially the UK and USA. There have been some comparative studies within wider geographical areas, such as Europe. But the present volume is perhaps the first, certainly the most extensive and up to date, systematic comparison of experience on a worldwide basis with the aim of identifying what works and what does not and why. The editors have invited me to focus this Foreword on the role of the market versus regulation. Each chapter in the book contains a wealth of relevant information, analysis, and stimulating interpretation, but it would be impossible to discuss and evaluate all the chapters here. Paul Joskow’s Introduction in any case does much of this job. It is a comprehensive, authoritative, indeed magisterial survey of experience worldwide. It reflects his incomparable research record and practical involvement in reform, and exhibits considered judgment. I cannot hope to better it, and I agree with it almost entirely, although we may differ on a few aspects of policy. I shall begin by briefly reiterating the aims, criteria, textbook model, and main lessons to be learned. These lessons seem to me deserving of general acceptance. Then I want to discuss four major topics – competition in the wholesale and retail markets, the nature of network regulation, and the regulation of transmission networks – where we observe not only variation in practice but also differences of view in the literature. Here I want to argue that there is a greater role for the market vis-à-vis regulation than is often accepted.1