Impact of Regulatory Agencies on the Efficiency of Publicly-Owned Utilities

We compare the economic efficiency of a publicly-owned utility directly controlled by the government with a publicly-owned utility regulated by a public utility commission (PUC). Regulation by a PUC is modelled as a Nash equilibrium of a game between two principals, the government and the PUC, each of them having control over a subset of decision variables determining the utility performance. A utility manager, who has private information over a productivity parameter, is the agent. Comparisons of both regulatory regimes are made with respect to output, choice of inputs, manager's information rent and firm's profit. Reasons for which the government should prefer one regulatory regime over the other are discussed. The recent regulatory reform of electricity markets in the province of Quebec (Canada) provides an illustration of the model.