Considerations for the Design and Transformation of Regulatory Systems

We examine the motivations for forming regulatory agencies and the features that are critical for their success. Governments create independent regulatory agencies to address two fundamental problems in the control of public utilities, namely the dampening effect that politics has on investment and the value of specialized knowledge. Agencies are more effective in stimulating investment if they are insulated from political pressures to behave opportunistically and if they have sufficient resources to overcome information asymmetries with operators. Forming or reforming regulatory systems create adaptive challenges for those whose authority, influence, and traditions are affected. Trained leadership professionals are often needed to help stakeholders through these transitions.