Volterra applies the concept of behavioural modelling to the regulated industries of Energy and Water in order to analyse the effect of existing and proposed regulatory incentives. Our findings describe a behavioural model that acknowledges the varying constraints and motivations present in the industry, some of which diverge from the assumptions of standard economics to which regulators and companies tend to have regard. The model has enhanced our understanding of the outcomes of regulation and shown that feasible differences in company and customer preferences and behaviour, combined with a one size fits all approach to regulation can have potentially unintended consequences.
Regulation within the Water Industry
Volterra and Indepen have been working together for several years on applying the concept of behavioural modelling to the regulation of the water industry to analyse the effect of existing and proposed regulatory incentives.
The most recent report, published in November 2012, uses this technique to consider the impact of some of the incentives proposals in Ofwat’s wholesale consultation. This report brings together a number of conclusions on:
- Ofwat’s options for rewards, penalties and trade-offs
- The current incentives on innovation
- The importance of understanding the customer utility function
Find out more…
Risk Regulation and Behavioural Modelling, a summary paper of the theory used.
Regulation within the Energy Industry
Volterra and Indepen worked for a group of energy companies along with the regulator Ofgem. We built a model to understand the different types of behaviour of energy companies and how certain types of regulation incentivised behaviour. Our model tested the extent to which the regulatory framework is aligned to the regulator’s aims and objectives along with customer preferences. The model tested how different types of incentives (relative v absolute, penalties v rewards, ability to trade-off) impacted upon the outcomes delivered for the end customer, the sharing of risk between different parties and the behaviours motivated by the regulatory system.