The Rationale of Economic Regulations: Theoretical Review

Regulation is about rules, procedures or guidelines aimed at ensuring the proper implementation of the sector policies and laws. In electricity sector, regulation is fundamentally divided into two core areas thus technical and economic regulations. The central issue of the economic regulation is the efficient exchange value through the recovery of the gamut of cost of providing electricity services, from generation point to final consumption point and associated services to ensure the reliability and sustainability of the sector. Cost-reflectivity of tariffs is one of the cardinal goals of electricity regulation. This is important to ensure the financial viability of firm and the continuous provision of services to consumers. However, challenges such as information asymmetry, limited regulator capacity and political interference make this goal difficult to achieve. This chapter traces the emergence of exchange value theory as the premises upon which electricity tariff emerges and provides a review on how these challenges can be overcome to develop an optimal electricity pricing regime. The central issue of this paper is to provide justification for regulation and also investigate and articulate the most efficient means of determining the price of electricity within a regulated environment.