Juan Rosellón Díaz

Energiewirtschaft IV (Industrieökonomische Analyse von Energiemärkten): Regulatory Economics Course with Applications to the Energy Sector

Temario del Curso “Teoría y Política de la Regulación”
4to Semestre. Maestría en Economía
Juan Rosellón

The plan of the course is as follows:

Introduction:

The course starts with an introduction to various issues on regulatory economics including the nature of regulation, regulatory constraints and instruments, and so forth. Next a non-formal development of price regulation concepts is carried out and some first policy application to energy are presented, especially to the case of electricity transmission expansion. The course introduction is finished with a discussion of structural regulation issues such as liberalization, vertical and horizontal integration, and access pricing. The introduction base texts are Laffont andTirole (1993) and Armstrong, Simon and Vickers (1994).

Mechanism Design, Contract Theory and the Canonical Model of Regulation:

In this course section, a brief formal introduction to mechanism design, contract theory (principal agent model) and Laffont’s canonical model of regulation is performed. We will go through main concepts and make most of the times reference to real world problems related to energy. The texts are Laffont (1988) (for mechanism design), Salanie (1997) (for contract theory) as well as Laffont (1994) (for the canonical regulatory model).

Price Regulation:

In this section we will derive from the canonical model the need for price regulation when there is lack of transfers from the regulator to the firm, and under market failures of asymmetric information and natural monopoly. We will address in detail regulation of single-product and multi product monopolies, and discuss several pricing rules including marginal-cost, average-cost, Ramsey, two-part-tariff, linear-cost, average-revenue, and tariff-basket pricing. We will also discuss weights and their implications on efficiency convergence. The text for this part of the course is Armstrong, Simon and Vickers (1994). Likewise, various papers will be used to illustrate applications to the natural gas and electricity sectors (see course bibliography at the end of syllabus).

Structural Regulation and Access Regulation:
Here we will address the issue of market architecture for infrastructure sectors, which combine contestable and natural (or legal) monopoly sectors. We will discuss various models including vertical integration, vertical separation, and vertical integration with liberalization. Likewise, we will address liberalization issues such as access pricing regulation. The text for this part the course is again Armstrong, Simon and Vickers (1994), plus some references on applications to the natural gas and electricity industries.

Case Study:
Through the course, a case study will be covered by the reading of various recent papers on regulatory mechanisms and their applications, both for the natural gas and the electricity sectors. See the list of references at the end of syllabus.

Other issues such as privatization and incentive theory applied to political economy (as in Laffont, 2001) might be addressed at the end of the course.

This is usually a semester course (around 45 hours), but it can be adapted to other time frameworks. It is supposed to be a course for upper-undergraduate and graduate economics students, but student from other backgrounds (such as engineering, mathematics or physics might fit in). Since we will be analyzing recent developments in incentive theory, a microeconomics course would be very helpful as a prerequisite. Background on industrial organization or game theory would also be useful but not crucial.

Grading usually sticks to the following structure:

(or writing of a research paper)
Es empfiehlt sich folgenden zusammenfassenden Artikel von Paul Joskow vor der Veranstaltung zu lesen: Incentive Regulation in Theory and Practice: Electricity Distribution and Transmission Networks, Paul L. Joskow, September 2005, CEEPR Working Paper (download). Dieser ist eine sehr gute Zusammenfassung des Themenkomplexes mit praktischen Beispielen und offenen Punkten. Es empfiehlt sich ebenfalls diesen Artikel NACH allen Vorlesungen (d.h. vor der Klausur!) nochmals zu lesen.

Complete Literature List

1. Armstrong, M., Simon, C. y Vickers J., Regulatory Reform. The British Experience. MIT Press. 1994.
2. Brito, D. L. and J. Rosellón, "Pricing Natural Gas in Mexico; An Application of the Little Mirrlees Rule", The Energy Journal, Vol. 24, No. 3, pp. 81-93, 2002, ISSN: 0195-6574
3. Brito, D. L. and J. Rosellón, “Price Regulation in a Vertically Integrated Natural Gas Industry: The Case of Mexico”, The Review of Network Economics, vol. 4, issue 1, pp. 75-92, March, 2005, ISSN: 1446-9022, http://www.rnejournal.com/index.html.
4. Brito, D. L., and J. Rosellón, "Regulation of Gas Marketing Activities in Mexico", Estudios Económicos, Vol.18, No.1 January-June 2003, pp. 15-35, ISSN: 0188-6916.
5. Carreón-Rodríguez, V. C., A. Jiménez and J. Rosellón, “The Mexican Electricity Sector: Economic, Legal and Political Issues,” in The Political Economy of Power Sector Reform: The Experiences of Five Major Developing Countries, David G. Victor and Thomas C. Heller, eds., Cambridge University Press, 2006, ISBN-13: 9780521865029 | ISBN-10: 0521865026.
6. Kristiansen, J. and J. Rosellón, “A Merchant Mechanism for Electricity Transmission Expansion “, Journal of Regulatory Economics, vol. 29, no.2, , pp. 167-193, March, 2006, ISSN: 0922-680X (Print) 1573-0468 (Online).
7. Laffont, J-J, “The New Economics of Regulation Ten Years After.” Econometrica. 62 No. 3. 11. 1994.
8. Laffont, J-J. and J. Tirole, A Theory of Incentives in Procurement and Regulation. MIT Press, 1993.
9. Laffont, J-J., Fundamentals of Public Economics. MIT Press, 1988.
10. Laffont, J-J., Incentives and Political Economy, Clarendon Lectures in Economics, Oxford, 2001
11. Ramírez, J. C. and J. Rosellón, "Pricing Natural Gas Distribution in Mexico", Energy Economics, Vol. 24, No. 3, pp. 231-248, May, 2002, ISSN: 0140-9883, Imprint: NORTH-HOLLAND (with J. C. Ramírez).
12. Rosellón, J. and J. Halpern, "Designing Natural Gas Distribution Concession in a Megacity. Tradeoffs between Scale Economies and Information Disclosure in Mexico City", Policy Research Working Paper, The World Bank, 2538, January 2001, http://ideas.repec.org/p/wbk/wbrwps/2538.html.
13. Rosellón, J. and J. Halpern, "Regulatory Reform in Mexico’ Natural Gas Industry. Liberalization in the Context of a Dominant Upstream Incumbent", Policy Research Working Paper, The World Bank, 2537, January 2001, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=632633.
14. Rosellón, J., “A Regulatory Mechanism for Electricity Transmission in Mexico,” Energy Policy, forthcoming, ISSN: 0301-4215, Imprint: ELSEVIER.
15. Salanié, B., The Economics of Contracts. MIT Press. 1997.
16. Sappington, David E.M., “Incentives in Principal-Agent Relationships”, Journal of Economic Perspectives 5:2, Spring: 45-66, 1991.
17. Vogelsang, I.  “Price Regulation for Independent Transmission Companies,” Journal of Regulatory Economics, 20(2): 141-165, 2001.
18. Vogelsang, I. “Incentive Regulation and Competition in Public Utility Markets: A 20-Year Perspective,“ Journal of Regulatory Economics, 22(1): 5-27, 2004.
19. Vogelsang, I. and J. Finsinger. “A Regulatory Adjustment Process for Optimal Pricing by Multiproduct Monopoly Firms,”  Bell Journal of Economics, vol. 10, No. 1, Spring: 157-171, 1979.
20. Wilson, R. “Architecture of Power Markets,” Econometrica, 70: 1299-1340, 2002.

Lecture presentations:

• Presentation 1
• Presentation 2
• Presentation 3
• Presentatíon Applications: Price Regulation

Lecture notes:

• Laffont, J-J. and J. Tirole (1993)
• Laffont, J-J. (1988): Chapter 5
• Salanié, B. (1997): Introduction, Chapters 2 and 5                     Solution 1
• Laffont, J-J. (1994)                                                                   Solution 2
• Armstrong, M., Cowan , S., Vickers J. (1994): Chapters 2
• Armstrong, M., Cowan , S., Vickers J. (1994): Chapters 3
• Armstrong, M., Cowan , S., Vickers J. (1994): Chapters 4
• Armstrong, M., Cowan , S., Vickers J. (1994): Chapters 5

Presentation papers:

• Maskin: Mechanism Design
• Akerlof: Contract Theroy
• Laffont: Incentives and Political Economy

Additional Literature:

• Review on Carreón-Rodríguez, V. C., A. Jiménez and J. Rosellón (2006)

Additional Litertature (New Palgrave Dictionary):
Mechanism Design:

• basic concept
• revelation principle
• new developments
• computing
• experiments
• matching and market design

Contract Theory

• basic concept
• principal and agent I
• principal and agent II
• adverse selection
• moral hazard
• incomplete contracts

Other

• Short Bio Laffont
• Procurement
• Switching 1 2 3

Degree/ Specialization: Ph.D. in Economics / Economics of Regulation
Nationality: Mexican
Department: Economics
Office phone: 5 727 9800 ext. 2711
Office Fax: (52) 5 292 1309, (52) 5 727 9878
E-mail: juan.rosellon@cide.edu