Regulation in Crisis: How to Make Decisions That Benefit Society

By Dr. Márcio Alcântara, Brasília, November 3, 2024

Imagine growing consumer dissatisfaction with electricity rates while companies in the sector argue that operating costs and infrastructure investments justify the prices they charge. This is the kind of conflict of interest that places the regulator at the center and calls for careful judgment. On one side are consumers seeking fairness and affordability. On the other are companies concerned with financial viability and the ability to sustain service. The question is this: as regulators, should we focus exclusively on protecting consumers, or should we seek a balance among all affected interests, including those of companies and government?

Historically, regulation emerged as a mechanism to correct market failures, protect consumers from abuses of economic power and ensure that essential services are provided efficiently and sustainably. According to Baldwin, Cave, and Lodge (2012), regulation should balance different interests to promote social welfare. Focusing on only one aspect can have negative consequences in the long run.

An approach that favors consumers alone may seem fair at first glance. However, Stigler’s (1971) theory of regulatory capture warns that regulation can be shaped by organized interests, potentially at the expense of economic efficiency. California’s electricity sector in the early 2000s illustrates another risk: price controls that fail to account for underlying market incentives. The retail rate freeze, combined with flaws in market design and a shortage of supply, culminated in blackouts and unstable supply (Joskow, 2001).

An approach that seeks to balance the interests of consumers, companies, and government can support a more sustainable regulatory environment. Ogus (1994) emphasizes that effective regulation takes into account the economic incentives facing the parties and seeks to align them with social objectives. In the United Kingdom’s telecommunications sector, liberalization and the creation of a balanced regulatory environment allowed new competitors to enter, improved service quality and lowered prices for consumers (Armstrong, 1997).

In Brazil’s water and sanitation sector, Law 11,445/2007 set national guidelines that sought to balance the need for universal service with the economic viability of the utilities.

Another relevant example is banking regulation after the 2008 financial crisis. Regulators around the world, following recommendations from the Basel Committee, sought to balance consumer protection and financial stability with banks’ need to remain financially viable. Too much regulation could restrict credit, while too little could lead to new systemic risks (Admati and Hellwig, 2013).

Involving all stakeholders in the regulatory process is essential. Responsive regulation, as developed by Ayres and Braithwaite (1992), emphasizes regulatory strategies that respond to the conduct and context of regulated entities rather than relying on a single enforcement approach. Black (2008), in turn, shows how the legitimacy and accountability of a regulatory regime are built and contested among the various actors who take part in it. In practice, this means holding public consultations and hearings and creating transparency mechanisms that allow an open and constructive dialogue.

The regulator’s role is neither simple nor one-sided. We must act as impartial decision-makers, seeking solutions that balance the interests at stake. Although consumer protection is fundamental, ignoring the financial viability of service providers or legitimate public policy objectives can lead to an unsustainable regulatory environment.

I therefore conclude that balancing the interests of the various affected parties is the most effective approach to regulating public services. This perspective not only protects consumers but also supports the financial sustainability of service providers and the achievement of public policy objectives.

References

• ADMATI, Anat; HELLWIG, Martin. The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It. Princeton: Princeton University Press, 2013.
• ARMSTRONG, Mark. Competition in Telecommunications. Oxford Review of Economic Policy, vol. 13, no. 1, pp. 64-82, 1997.
• AYRES, Ian; BRAITHWAITE, John. Responsive Regulation: Transcending the Deregulation Debate. New York: Oxford University Press, 1992.
• BALDWIN, Robert; CAVE, Martin; LODGE, Martin. Understanding Regulation: Theory, Strategy, and Practice. 2nd ed. Oxford: Oxford University Press, 2012.
• BLACK, Julia. Constructing and Contesting Legitimacy and Accountability in Polycentric Regulatory Regimes. Regulation & Governance, vol. 2, no. 2, pp. 137-164, 2008.
• BRAZIL. Lei nº 11.445, de 5 de janeiro de 2007 [Law 11,445 of January 5, 2007, establishing national guidelines for basic sanitation].
• JOSKOW, Paul L. California’s Electricity Crisis. Oxford Review of Economic Policy, vol. 17, no. 3, pp. 365-388, 2001.
• OGUS, Anthony. Regulation: Legal Form and Economic Theory. Oxford: Clarendon Press, 1994.
• STIGLER, George J. The Theory of Economic Regulation. The Bell Journal of Economics and Management Science, vol. 2, no. 1, pp. 3-21, 1971.

The opinions and analyses expressed in this article are personal and do not represent the positions, decisions or institutional views of the Brazilian Electricity Regulatory Agency (ANEEL).