Demand Factor adalah rasio (perbandingan) dari the maximum coincident demand dari sebuah sistem, atau bagian dari sistem, dengan the total connected load:

Demand Factor = Maximum demand (peak load) / Total connected load

The demand factor selalu bernilai < =1 or < =100%

The lower the demand factor, the less system capacity required to serve the connected load.

Contoh demand factor: 

(1) A residence consumer has 10 no’s lamp of 400 W but at the same time It is possible that only 9 No’s of bulbs are used at the same time. Here total connected load is 10×40 = 400 W. Consumer maximum demand is 9×40=360 W. Demand Factor of this Load = 360/400 = 0.9 or 90%.

(2) One Consumer have 10 lights at 60 Kw each in Kitchen, the load is 60 kW x 10 = 600 kW. This will be true only if All lights are Turns ON the same time (Demand factor=100% or 1). For this Consumer it is observed that only half of the lights being turned ON at a time so we can say that the demand factor is 0.5 (50%). The estimated load = 600 kW x 0.5 = 300 kW.

Diversity Factor is rasio (perbandingan) dari penjumlahan maximum demands dari setiap individu dari berbagai sub sistem dari sebuah sistem dengan maximum demands dari seluruh sistem.   

Diversity Factor = Sum of Individual Maximum Demands / Maximum Demand of the System.

The diversity factor selalu bernilai >= 1 atau >= 100% karena jumlah maximum demand setiap individu lebih besar dari maximum demand dari sistem. 

Greater the diversity factor, lesser is the cost of generation of power. 

Contoh diversity factor:

One Main Feeder have two Sub feeder (Sub Feeder A and Sub Feeder B), Sub Feeder-A have demand at a time is 35 KW and Sub Feeder-B have demands at a time is 42 KW, but the maximum demand of Main Feeder is 70 KW.

Total individual Maximum Demand =35+42=77 KW. Maximum Demand of whole System=70 KW

So Diversity factor of The System= 77/70 =1.1

 

Coincidence Factor is the ratio of the maximum demand of a system, or part under consideration, to the sum of the  individual maximum demands of the subdivisions. 

The reciprocal of diversity factor is coincidence factor. 

Coincidence factor = Maximum demand / Sum of individual maximum demands

Expressed as a percentage (%) or a ratio less than 1. 

Biaya modal pembangkit listrik tergantung pada kapasitas pembangkit listrik. Semakin rendah permintaan maksimum pembangkit listrik, semakin rendah pula kapasitas yang dibutuhkan dan oleh karena itu semakin rendah pula biaya modal pembangkit tersebut. 

Dengan jumlah konsumen tertentu, semakin tinggi faktor keragaman muatannya, semakin kecil kapasitas pembangkitan yang dibutuhkan dan akibatnya biaya tetap akibat penanaman modal akan jauh berkurang.

Demikian pula faktor permintaan yang lebih tinggi berarti lebih banyak beban rata-rata atau lebih banyak jumlah unit yang dihasilkan untuk permintaan maksimum tertentu dan oleh karena itu biaya keseluruhan per unit energi listrik yang dihasilkan berkurang karena distribusi biaya tetap yang sebanding dengan permintaan maksimum dan tidak bergantung pada jumlah unit yang dihasilkan. 

Oleh karena itu, perusahaan utilitas harus selalu berusaha meningkatkan faktor beban serta faktor keragaman. Upaya yang dapat dilakukan antara lain dengan mendorong konsumen untuk menggunakan energi listrik di luar jam sibuk dan pengenaan tarif yang lebih rendah untuk skema tersebut. 

Sumber: 

https://www.sanjaysah.com.np/2017/08/demand-factor-diversity-factor.html

https://web.pln.co.id/statics/uploads/2023/05/Statistik-PLN-2022-Final-2.pdf

Mulai tanggal 1 Januari 2015 konsumen listrik Indonesia akan mengalami tarif listrik yang tidak hanya naik namun juga turun. Hal tersebut dapat terjadi karena adanya mekanisme tariff adjustment yang merupakan amanat dari Permen ESDM No 31 Tahun 2014 Tentang Tarif Tenaga Listrik Yang Disediakan oleh Perusahaan Perseroan (Persero) PT. Perusahaan Listrik Negara.

Dengan mekanisme ini diharapkan terciptanya kelangsungan pengusahaan penyediaan tenaga listrik, peningkatan mutu pelayanan kepada konsumen, peningkatan rasio elektrifikasi, dan mendorong subsidi listrik yang lebih tepat sasaran serta penerapan penyesuaian tarif tenaga listrik (tariff adjustment) untuk beberapa golongan pelanggan tertentu.

Sesuai dengan Peraturan Menteri ESDM Nomor 31 Tahun 2014, mulai 1 Januari 2015 terdapat 12 (dua belas) golongan pelanggan tarif non subsidi yang akan diterapkan tariff adjustment, yaitu : (1) Rumah Tangga R-1/TR daya 1.300 VA, (2) Rumah Tangga R-1/TR daya 2.200VA, (3) Rumah Tangga R-2/TR daya 3.500VA s.d 5.500VA, (4) Rumah Tangga R-3/TR daya 6.600VA keatas, (5) Bisnis B-2/TR, daya 6.600VA s.d 200kVA, (6) Bisnis B-3/TM daya diatas 200kVA, (7) Industri I-3/TM daya diatas 200kVA, (8) Industri I-4/TT daya diatas 30.000kVA, (9) Kantor Pemerintah P-1/TR daya 6.600VA s.d 200kVA, (10) Kantor Pemerintah P-2/TM daya diatas 200kVA, (11) Penerangan Jalan Umum P-3/TR dan (12) Layanan khusus TR/TM/TT.

Perubahan tarif listrik tergantung dari biaya penyediaan listrik oleh PT PLN yang dipengaruhi oleh tiga (3) faktor yaitu (1) harga bahan bakar; (2) nilai tukar rupiah; dan (3) inflasi bulanan. Apabila biaya penyediaan listrik naik maka tarif listrik juga naik, demikian juga sebaliknya.
Dengan diterbitkannya kedua peraturan ini maka diharapkan masyarakat mendapatkan manfaat berupa pelayanan tenaga listrik yang semakin baik.

Tulisan SIBernas kali ini mengulas tentang pemantaan sampah menjadi energi terkait dengan dukungan pemerintah. Fasilitas WtE ini sangat penting terkait dengan upaya penurunan global warming. 

Dengan adanya fasilitas WTE ini akan memberikan nilai yang sangat tinggi dalam berkontribusi melawan pengaruh pemanasan global (global warming) melalui pengurangan emisi gas rumah kaca (greenhouse gas emissions). Diperkirakan sekitar ekuivalen satu ton CO2 yang dapat dikurangi dari setiap satu ton sampah kota yang dikelola melalui kegiatan waste to energy yang diakibatkan dari (1) pengurangan emisi gas metana yang seharusnya akan ditimbulkan dari timbunan sampah; (2) pengurangan emisi CO2 yang seharusnya akan dihasilkan dari penggunaan energy fosil untuk membangkitkan tenaga listrik; dan (3) pengurangan emisi CO2 yang seharusnya akan dihasilkan dari produksi metal. (the US EPA)

WTE masuk dalam kategori sumberdaya terbarukan (renewable resource). Permen ESDM No. 19 tahun 2013 secara jelas menyatakan bahwa pembangkit listrik berbasis sampah kota merupakan pembangkit listrik yang menggunakan energi terbarukan berbasis sampah kota. Kriteria utama sebagai sumberdaya yang terbarukan dipenuhi oleh WTE yaitu sumber energinya bersifat lokal (indigenous) dan berkelanjutan (sustainable). Fasiltas WTE mendapatkan energi yang berharga dari sampah setelah proses“reduce, reuse, and recycle” sudah dilakukan baik oleh rumah tangga, pengelola maupun pemerintah.

Fasilitas WtE memiliki kesempatan untuk menghasilkan kredit karbon yang dapat diperdagangkan (certified emission reductions/CERs) melalui mekanismes Clean Development Mechanism. CERs telah dapat diterima secara global sehingga sertifikat yang diterima oleh fasilitas WTE dapat diperdagangkan di seluruh dunia.

Selain itu, WtE sejalan dengan kebijakan nasional dalam pengelolaan sampah dimana sampah sebagaimana diamanatkan oleh UU 18 tahun 2008 maupun PP 81 tahun 2012

Kementerian ESDM mendukung sepenuhnya pemanfaatan WtE dengan terbitnya Permen 19/2013 tentang Pembelian Tenaga Listrik oleh PT PLN (Persero) dari Pembangkit Listrik Berbasis Sampah Kota. Peraturan tersebut  pada intinya adalah menetapkan harga jual listrik (feed in tariff) untuk tenaga listrik berbasis sampah kota.

Permen ESDM tersebut menetapkan harga jual listrik yang sangat kompetitif untuk tenaga listrik yang berasal pengelolaan sampah. Butir-butir penting dari Permen dimaksud disusun dalam Tabel 1 sebagai berikut.

Pokok-Pokok Pengaturan Permen ESDM 19/2013

Alternatif Struktur Industri Listrik

• Pengaturan mengenai kerjasama antar pemegan izin usaha penyediaan tenaga listrik (IUPTL). Dimana pemegang wilayah usaha yang terlibat adalah pemegang wilayah usaha yang telah beroperasi yaitu memiliki konsumen dan memiliki pembangkit atau kontrak jual beli tenaga listrik secara curah;  
• Mengatur tentang pemanfaatan bersama jaringan transmisi tenaga listrik dimana diatur bahwa usaha transmisi tenaga listrik tidak dibatasi oleh Wilayah Usaha. Selain itu diamanatkan bahwa Badan Usaha Transmisi tenaga listrik wajib membuka kesempatan pemanfaatan bersama jaringan transmisi tenaga listrik;  
• Badan Usaha Distribusi tenaga listrik melaksanakan kegiatan di dalam Wilayah Usaha. Usaha distribusi tenaga listrik juga diminta untuk membuka kesempatan pemanfaatan jaringan distribusinya; dan
• Pemegang Izin Operasi (IO) diberikan kesempatan untuk melakukan interkoneksi dengan jaringan tenaga listrik milik pemegang izin usaha tenaga listrik (IUPTL). 

Lagi browsing ketemu artikel yang menarik mengenai konsep unbundling dan pemanfaatan bersama (open access) terutama terkait dengan penyediaan energi dan listrik..

1. Negotiated Access, suatu Badan usaha secara sukarela membagi pemanfaatan fasilitas dengan pihak lain melalui skema business to business berdasarkan perjanjian, tanpa ada regulasi yang mewajibkan pemilik fasilitas untuk membagi pemanfaatan dengan badan usaha lain. Jadi, dalam skema ini pemilik fasilitas mempunyai hak untuk memutuskan akan membagi/tidak pemanfaatan fasiltas miliknya kepada pihak lain dan tidak ada sanksi jika tidak melakukannya.
2. Third-party Access, dimana terdapat regulasi yang mewajibkan badan usaha pemilik fasilitas pengangkutan untuk membagi pemanfaatan bersama pihak lain; apabila masih ada kapasitas lebih yang dapat digunakan oleh pihak lain. Dengan kata lain, pemanfaatan bersama dibatasi oleh besarnya kapasitas fasilitas yang masih tersedia. Pemanfaatan bersama bisa dilakukan jika sudah ada persetujuan dari pemilik fasilitas, pengguna dan regulator.
3. Open access, fasilitas yang dibangun oleh suatu Badan Usaha dimanfatkan bersama dengan prinsip first come first serve. Regulasi mewajibkan pemilik fasilitas pengangkutan membagi pemanfaatan fasilitas selama masih dalam batas maksimum kapasitas. Skema ini sekaligus memisahkan antara pengelola fasilitas (Transponder) dan pengguna (Shipper).
4. Common Carriage, fasilitas pipa diwajibkan untuk dapat diakses seluruh pengguna tanpa batasan kapasitas. Dasar penggunaan melalui penyesuaian alokasi kapasitas pengguna,jadi prinsip dalah semua harus dapat menggunakan melalui penyesuaian kapasitas. Dengan kata lain, siapapun pengguna yang memenuhi syarat berhak mendapatkan akses untuk menggunakan fasilitas dengan konsekuensi mengurangi alokasi penggunaan fasilitas oleh pihak lain.

1. Account unbundling: keuangan dari kegiatan infrastruktur harus terpisah dari keuangan kegiatan suplai
2. Functional unbundling: keuangan maupun manajemen kegiatan infrastruktur harus dipisah dari kegiatan suplai
3. Legal Unbundling: kegiatan infrastruktur dan kegiatan suplai masing-masing berada dibawah bendera entitas legal yang berbeda. Namun, masih dapat berada dalam struktur perusahaan induk, sehingga perusahaan induk masih memiliki kepemilikan.
4. Ownership Unbundling: kegiatan infrastruktur dan kegiatan suplai harus dilakukan dan dimiliki oleh entitas yang berbeda dan masing-masing entitas ini tidak boleh mempunyai kepemilikan di dalam sekaligus kedua aktivitas tersebut. 

Early history
Natural Gas Act in 1938
Real government involvement in natural gas industry started in 1938 when Natural Gas Act (NGA) issued. NGA mandated Federal Power Commission (FPC) established in 1920 to rule interstate natural gas delivery due to heavily concentrated and market power in interstate pipelines. 

In 1954
In 1954 Supreme Court decided based on Phillips Petroleum vs. Wisconsin case that wellhead gas prices were regulated by FPC because there was evidence of excessive prices charged by producers. Therefore since 1954 interstate pipeline and wellhead prices were regulated but not intrastate pipeline. The FPC adopted national price ceilings for the sale of natural gas (wellhead) into interstate pipelines.

The regulation of natural gas prices created economic incentives for producers to divert interstate gas to the unregulated intrastate market where they could obtain higher prices. The regulated prices dampened the incentive to invest in the production of natural gas, which led to the gas shortages in the 1970's. the regulations that were supposed to protect interstate customers from high prices of gas forced them to consume the even higher priced alternative fuels.

In 1977 Federal Energy Regulatory Commission (FERC) replaced FPC and took over all FPC responsibilities. 

NGPA in 1978
To overcome the problem Natural Gas Policy Act (NGPA) was issued in 1978. NGPA while allowing higher prices for new gas wells it kept all old wells selling at the existing prices. In other words, all new gas was to be decontrolled from 1985 (price ceiling gradually increased/phase out) but gas from wells begun before 1977 was to remain controlled. 

Open access era
FERC Order 436 in 1985
The industry evolved further. FERC issued order 436 which separated gas transportation (pipelines) from bundled merchant services on voluntary basis. In other words, Pipelines did not require offering transportation only services but if they did, access rate must not be nondiscriminatory.  This order started open access era in natural gas industry.

NGDWA 1989
In 1989 Natural Gas Wellhead Decontrol Act eliminated all remaining wellhead ceiling by 1993. Thus, allowing the market to completely determine the price of natural gas at the wellhead.

FERC Order 636 in 1992
The FERC Order 636 in 1992 revised Order 436 by requiring (mandatory) pipelines to separate gas sales from transportation and allowing open access to pipeline transportation for gas producers and consumers. Order 636 also allowed firm holders of pipeline capacity to resell or release their capacity to other shippers and required pipelines to permit shippers to use flexible receipt and delivery points.

Regulatory transformation changed the industry dramatically from supply shortage in the 1970s to surplus in the 1980s. In 1987 natural gas provided 22% of total US primary energy sources and 45% of all delivered to residential.

Recent Industry
GCPP in 1999
In 1999 Illinois Commerce Commission (ICC) approved Nicor Gas proposal of alternative regulation for gas costs called Gas Cost Performance Program (GCPP). The performance based regulation (PBR) issued among others to respond FERC’s restructuring program particularly deregulation of wellhead gas prices and services as well as separation merchant function of interstate pipelines. This required local distribution company (LDC) to manage its own portfolio of wellhead gas supplies and transportation services. PBR works by comparing “a benchmark” with company actual gas costs and the surplus or deficit will be shared between company and customers. 

FERC Order 637 in 2000
Several problems had arisen after Order 636 issued. Therefore FERC Order 637 revised some orders among others (i) waived the price ceiling for short-term released capacity (less than one year) until September 2002; (ii) permitted pipelines to propose contracts for capacity with peak/off-peak an term differentiated rate structures.  

Today's natural gas market is again in the process of change, and is substantially different operationally and economically from away back in 1970s. Upstream and downstream wholesale markets are maturing as well as financial markets with a variety of options and futures contracts.

Natural monopoly happens when, at the socially optimal quantity output (q), a single firm is able to produce total output at a lower total cost than multiple firms do. It means that only single firm serves the market and it is called as subadditivity. One obvious example is electricity industry due to its peculiar behavior e.g. large fixed-cost and non-storability. In other words, Natural monopoly occurs when in the long run, average cost (AC) is declining as demand (output) increases because the total cost is dispersed over output level for long period and thus declining AC will push down MC below it.

Given only one firm is operating in the market, firm will act to maximize its profit and it will choose to produce output (q) where its marginal revenue (MR) is equal to marginal cost (MC). We know that it creates allocative and productive inefficiencies (deadweight losses/DWL). See figure 1. 




Therefore, government steps in when natural monopoly exists. But, the problem is not over. Regulator is in onerous position because the two available choices are not economic efficient. First, when the efficient price is imposed (P=MC), firm will make a loss (see figure 2). So this is not an option.

The second option is set price equal to average cost (P=MC). This condition  also creates inefficiency (DWL) and firm makes profit. It seems that this is not suitable solution. See figure 3.

Thus, how to set appropriate price in natural monopoly is not trivial problem. 

Projected as the winner of New Hampshire Primary, front-runner GOP Presidential Candidate Mitt Romney delivered a speech in front of his supporters on Tuesday January, 11 2012 in New Hampshire.

While I was listening to the speech, I wads remembered my lectures in previous semester. Is there any relationship between the speech and economic theory? Intending to answer my silly questions, I took more notice on what Mitt Romney was trying to deliver. Thus, if you have same concern, you may continue to read this blog.

That Victory Speech

I found full text of his speech on this website. After that, I tried to find particular sentences having “doable meaning” in terms of economics theory (not only rhetorical/metaphorical sentences) or in strategic management point of view these selected sentences are not vision/mission level statements but rather action level statements. Then I chose two of the selected sentences for my further analysis, I call these as pledges, as follows.

Pledge 1: “…President Obama wants to put free enterprise on trial… I stand ready to lead us down a different path, where we are lifted up by our desire to succeed, not dragged down by a resentment of success…”

Pledge 2: “…He enacted job-killing regulations; I’ll eliminate them…”


Discussion

So, I try to explain the speech in terms of economic theory of regulation. Firstly, I recommend you to read my other article about theories economic regulation. This discussion is based on the more adequate theory which is Economic Theory of Regulation (ET) firstly proposed by Noble laureate George J. Stigler.

1. ET says that regulation is like economic good. There are sellers/suppliers and buyers and it has equilibrium demand and supply.

So, it can be shown that Mitt Romney as a candidate of supplier of regulation (including policies) was trying to sell his product to demanders/buyers (the voters and the financial supporters/firms). I thing we already aware that to win the race a candidate must have sufficient votes and to achieve it a candidate needs to collect adequate money to support candidate’s campaign. From the excerpts of Romney speech, we know that Romney tried to treat his buyers (the voters and firms). Generally, for the firms, he convinced them that he will not put free enterprise on trial (Pledge 1), whilst for the voters he promised that he will enacted job-killing regulations (Pledge 2). It is assumed that if Romney wins the presidential election and then he wants to realize his pledges (his victory speech). Furthermore, ET also says that Romney’s utility consists of (a) remaining in his office through maximizing political support (to be elected) and (b) redistributing wealth trough regulation.

In fact, demanders (voters and firms) compete for their own interest (gaining the most benefit from the regulation). Voters concern about reducing price of real good in market (such as lower electricity rate, telephone rate, gasoline price, etc), in economics theory it can be achieved through competition and it means setting price where firm’s profit is zero. On the other hand, firm’s interest is how to increase the profit, generally it means setting price such as monopolistic market. In short, voter and firm interest are inversed. In fact, this condition becomes constraint for the supplier to maximize its utility (Ups, it sounds like a constraint maximizing problem in economics theory).

So, when Romney gets first utility (elected), regardless the constraints, he will realize his promise by making certain regulation at which so that (real) voters get more benefit and producers get worst off (remember about Pareto Optimality, we can not make one better off without making other worst off). Wait, of course the producers complain “Hey, I gave you the money for campaign”, in fact the constraints exist.

Romney must recalculate his second utility. So, his modest choice is setting policies so that price falls between competitive price desired by voters (means zero profit) and monopolistic price demanded by producers (means maximizing profit)[1].

Here we can conclude that typically producers who operate in competitively industry or monopolistic industry request to be regulated because they will get relatively biggest benefit. Simple diagram below hopefully explains more.





2. Major result derived from ET: regulation biases toward small interest groups with higher per capita benefits from regulation.

Simple meaning from above statement is that regulations will be pro-producers (pro-firms). Back to Romney’s Speech, we can conclude that Pledge 1 will likely happen because main demanders are firms. Here I have a simple guess, one of the demander for the Pledge 1 is AT&T because (a) Obama administration already stated that they will block the AT&T merger (in fact my lecturer told me about this in the class J); and (b) telecommunication is a relatively competitive industry therefore it likely needs “a protection” (see previous section of this blog).

“Does it mean that the telecommunication price will be increased?”

I don’t think so. In this case, AT&T needs specific policy not an increasing tariff rate (so that hopefully the policy will increase AT&T profit). It also needs to be emphasized that price-notion in this discussion is not merely increasing price of goods or services through regulation but can be in the form of policies (permits, licenses, entry barriers, and so on). However, indirectly I can say that it will end up with increasing in price too.

“I am a worker, so, at least Pledge 2 also will likely happen, is it right?”

Well, sorry to say that we need to have more information about Pledge 2 (such as in what industry, type of regulation, etc). I have not mentioned this before, actually Pledge 2 imposes not only to the voters (workers) but also the firms (on which the regulation will affect). So, if both of them (impacted voters and firms) become Romney’s supporters, simply we can conclude that the firms (small interest groups with higher per capita benefits) will get the most benefits and Pledge 2 will unlikely happen (this is extremely conclusion but not always be the case).

So far, this is a dull and inaccurate explanation on my silly question on Mitt Romney’s Victory Speech. Comments and suggestions then become important parts to make this more precise and meaningful.


References:
1. Loomis, D. G. (2011). ECO 335 Economics of Regulation and Antitrust. Lecture Notes .
2. Sonmez, F. (2012, January 10). Mitt Romney’s New Hampshire primary speech (TEXT). Retrieved January 12, 2012, from The Washington Post Website: http://www.washingtonpost.com/blogs/elec…
3. Viscusi, W. K., Harrington, J. E., & Vernon, J. M. (2005). Economics of Regulation and Antitrust. MIT Press Book.

Definition
Price discrimination (PD) can be defined as set different prices for identical products (goods or services) to different groups of consumers.

There are three types of price discrimination in common which can be explained as follows.

• First degree PD is used by producers to equate all consumer surplus usually using fixed charge and variable charge.  
• Second degree PD. This type refers to charging price based on quantity demanded by customers. Usually this follows declining block price as demand increases (additional) the price drops.
• Third degree PD. It happens when price is charge based on customer segmentation e.g. groups of age, income, etc. 

In the USA to protect consumer from harmful effect of PD the Robinson Patman Act (RPA) was issued amended Clayton Act. the RPA states that it is prohibited to a seller from charging buyers at different prices for goods of “like grade and quality” where the effect may be to weaken competition. Effects to the competition can be distinguished into (i) Primary line - injury to competition in the seller’s own market and (ii) Secondary Line - injury to competition in the buyer’s market.

Two major cases had been brought to the court are:

• Utah Pie case. In this case a small frozen dessert pie manufacturer in Salt Lake City, Utah Pie Company, brought the suit against three large rivals: Continental Baking, Carnation, and Pet Milk. The three large rivals had manufacturing facilities in California, but not in Utah. Hence, when Utah Pie opened its frozen pie plant in Utah, it obtained a significant cost advantage over its larger rivals. 
• Morton Salt case. In the 1948 Morton Salt case is the landmark case involving secondary-line discrimination. Morton Salt sold its Blue Label salt to wholesalers and to chain stores according to specific discounts based on quantity sold. It was find out that Only five customers ever bought sufficient quantities of salt to obtain the most cheapest price. These were large chain stores.

In the daily life, one frequently faces economic phenomena that seem so strange or difficult to understand, especially related to regulatory actions. Therefore, understanding economic regulation may help one in responding facts or events which occur. Here is simple note about the topic which is summarized from several references presented in the end of this blog.

What does economic regulation?

• Regulation is “a state imposed limitation on the discretion that may be exercised by individuals or organizations, which is supported by the threat of sanction.”
• However, market power still plays a large role because it is impossible to intervene every decision of firms and consumers.
• Furthermore, economic regulation “refers to government-imposed restrictions on firm decisions over price, quantity, and entry and exit”.

When does economic regulation happen?

• Basically, there are two common conditions in which government intervention occurs. Firstly when an industry is natural monopoly or secondly when it is plagued by externalities.

Who are the regulatory actors?

• Regulation occurs through legislative action (legislator) and the behavior of the regulatory agency (regulator).

• We should notice that judiciary also has key role in the regulatory process. When a regulation needs to be reinterpreted (to implement a change), it must need judicial consent.

How does regulation affect the economics agents?

• Regulation controls the market through three main variables which are:

Control of price. Regulation may set a price that firms must charge, or restrict firms to setting prices within a range. In regulated industries (public utilities), it is common to set price so that the firm earns a normal rate of return. Another form is price incentives such as imposing a tax on various activities.

Control of quantity. Generally regulation set maximum production limits. Controlling quantity may be used with or without price regulation. In electricity industry, for example, the regulator sets the price while leaving quantity as unregulated. However, in the oil industry, oil production for OPEC members is set while allowing the price to be determined by the international market.

Control of entry and exit (Number of firms). Regulation may control entry by new firms, and also entry by existing regulated firms into a new industry or new geographic market. Actually, controlling price and number of firms are the main targets of regulation because both are keys for promoting allocative and productive efficiency.

• In fact, regulation occasionally controls other variables such as quality of product and firm’s investment.

Why does economic regulation exist?

• Mainly, three theories exist to explain the reason behind certain regulation occurs. These three theories are: (a) Public Interest Theory or Normative Analysis as Positive Theory (NPT); (b) Capture Theory (CT); and Economic Theory of Regulation (ET).
• In general, the conclusions of these theories are that regulation occurs because (1) the government is interested in overcoming information asymmetries with the operator and in aligning the operator’s interest with the government’s interest; (2) customers desire protection from market power when competition is non-existent or ineffective; (3) operators desire protection from rivals; or (4) operators desire protection from government opportunism.
• More explanation of those three theories as follows.

References:

1. General Concepts/Theories Regulation. (2012). Retrieved 01 2012, 2012, from Body of Knowledge on Infrastructure of Regulation: http://www.regulationbodyofknowledge.org…
2. Loomis, D. G. (2011). ECO 335 Economics of Regulation and Antitrust. Lecture Notes.
3. Viscusi, W. K., Harrington, J. E., & Vernon, J. M. (2005). Economics of Regulation and Antitrust. MIT Press Book.