Independent Utility Regulators: Lessons from Monetary Policy

Abstract

This paper explores the similarity of the underlying economic problems that lead to the establishment of (a) independent central banks to operate national monetary policies and (b) independent regulatory agencies for telecommunications and other utility service industries. We show that, in both cases, the adoption of agencies independent of government results from the need to achieve credibility and a reputation for economically sound long-run behaviour while preserving significant discretion to handle unanticipated events. We show that this solution is superior to policy rules that are fixed in advance. Both for central banks and regulatory agencies, what is required are institutions that provide limited and accountable discretion within a clear policy framework, for example via high levels of accountability and transparency in their decision making processes. On the basis of a review of the empirical literature, we argue that central banks with superior governance arrangements, particulary on accountability and transparency, out-perform those with inferior arrangements and we discuss how this work might be extended to utility regulatory agencies.

Keywords: Monetary Policy, credibility, regulation, under-investment, delegration

JEL Classification: C72, E61, L51