Raising public awareness and trust in transmission infrastructure projects with incentive regulation: Tools and biases

Abstract

Raising public awareness and trust in transmission infrastructure development is one of the key current challenges facing Transmission System Operators (TSOs) and other project developers. The result can be costly delays. Fine-tuning the regulatory toolbox that National Regulatory Authorities (NRAs) apply to incentivise TSOs can be part of the solution. The toolbox consists of cost-plus or rate of return regulation, price or revenue cap regulation, and output regulation. Each of these tools has strengths and limitations in terms of biases. In this brief, we identify the biases that are specific to stakeholder engagement activities that TSOs undertake to increase the public awareness and trust. Under the cost-plus approach, NRAs are biased towards the least controversial activity. Thus, the TSOs will try to anticipate the costs that will be more easily approved by the regulator. However, these least controversial activities may not be the most effective. Under the price/revenue cap, TSOs can be biased towards prioritising activities that result in the highest direct improvement of cost efficiency. They can also be biased in selecting the least controversial activities rather than the most cost-effective ones, simply because it can adversely affect their reputation and their engagement with the regulator. Under output regulation, independent experts can help the regulator to assess and challenge the stakeholder engagement activities undertaken by a TSO. This approach, however, requires a higher level of sophistication and complexity so that it can only be managed properly by a regulatory agency with sufficient resources and skills.