Step 11: Determine appropriate length of regulatory periods

A regulatory period typically refers to the time between a major review of the underlying components of a determined rate regime (such as the allowed rate of return, the efficiency factor, performance standards, etc.) and the subsequent review. Separate regulatory periods can also be devised to account for timing to establish new institutions and to ease the transition to a new type of regulatory structure.

Ultimately, there is no unambiguously optimal time period. Determining the appropriate length of the regulatory period requires balancing competing pressures; factors that influence the selection include the stability (or predictability) of the underlying economic and financial factors, as well as the administrative costs associated with regulatory oversight. Generally, most regulatory periods throughout the world range between three and five years – regulatory periods that are relatively longer or shorter than this are associated with their own risks.

If regulatory period is
shorter than 3 years

  • The utility may not have sufficient time to achieve target productivity or performance results

  • Will not match the planning horizon for a capital-intensive industry with long-lived assets

If regulatory period is
between 3-5 years

  • Provides sufficient certainty regarding regulatory treatment that the utility feels comfortable engaging in long-term investment programs

  • Provides the utility with more flexibility to manage capital replacement

If regulatory period is
longer than 5 years

  • The utility’s longer-term financial position may be compromised if it cannot change ‘unachievable’ performance target levels

  • Hinders the regulator’s ability to act on changing circumstances in a timely fashion
factors to consider when determining the length of regulatory periods
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