Fragile Commitments And The Regulatory Process

Abstract

Once a regulated utility has made an irreversible capital investment, that investment becomes vulnerable to appropriation by a regulator. This Article explores the incentives and strategies of the investor, the consumer, and the regulator-before and after capital investments are sunk-within a game-based model of regulation. A regulator, even one whose allegiance lies wholly with consumers, will find it advantageous to commit to repaying investor capital. A consumer gains when regulatory commitment to repaying capital is made less fragile. Commitment often does not take the form of a promise or contract. Historically, the most important force for keeping regulators faithful has been the continuing need for future investment. New methods for making commitments more sturdy include adopting technologies that result in small repeated investments, greater use of market transactions, and regulator involvement in the firm's planning decisions.