Deregulation and Strengthening Regulation: On Government Regulation Reform in Transforming Economies

Author: Chen Fuliang
Publisher:
Publishing Time: Not available
Features: Franchise Bidding System. If the government grants a monopoly operating franchise to a specific enterprise, due to the lack of competitive incentives, there may be a tendency for the enterprise to be reluctant to improve its internal efficiency. As a means to alleviate or eliminate this drawback, one approach is to limit the granted operating franchise to a certain period and, after the franchise period ends, reissue the franchise through competitive bidding. Under this system, when the government determines that it is economically feasible to entrust a specific enterprise with the provision of public services or certain public utility services, it grants the enterprise a monopoly, while simultaneously aiming to incentivize the enterprise to improve its internal efficiency. After a certain period, competitive bidding is used to determine which enterprise will be granted the franchise based on its ability to provide better quality services at a lower price. This is known as the franchise bidding system.
Regional Competition. Regional competition involves dividing regulated national monopoly enterprises into several regional enterprises, thereby motivating specific regional enterprises to improve their internal efficiency through the achievements of other regional enterprises.
Social Contract System (or Cost Adjustment Contract). The social contract system (or cost adjustment contract), widely practiced in the U.S. electricity sector, is renowned as an effective strategy for implementing incentive regulation. It refers to agreements between regulatory authorities and regulated entities regarding revisions to charges, covering aspects such as equipment operation rates, thermal efficiency, fuel costs, purchased electricity prices, and construction costs. If the enterprise achieves results better than those stipulated in the contract, it receives rewards; otherwise, penalties are imposed.
Price Cap Regulation. Price cap regulation was proposed during the privatization of British Telecom. It is a form of price regulation that incentivizes internal efficiency improvements, where regulatory authorities and regulated enterprises enter into price adjustment contracts similar to those in the social contract system, setting a price cap that allows prices to fluctuate freely below this limit in principle.
However, incentive regulation can also lead to drawbacks. The franchise bidding system is not widely used in natural monopoly industries because natural monopolies have strong cost-sunk characteristics. If a new enterprise replaces an old one through bidding, the disposal of the old enterprise's fixed assets becomes a challenge, inevitably leading to waste and losses. In competitive industries, this may not be a major issue. The problem lies in the fact that the franchise bidding system may not guarantee effective competition. The reasons are as follows:
There is a risk of collusion and compromise among bidding enterprises. This risk is particularly high when the number of participating bidding enterprises is small.
Existing enterprises with franchises often hold strategic advantages over new entrants in bidding. That is, during the period of holding the franchise, existing enterprises gain experience-based benefits through operations and services, making it more likely for them to achieve lower costs than new entrants. Moreover, existing enterprises have more comprehensive information about operational, sales, and demand structures than new entrants, leading to information asymmetry.
These reasons indicate that,