World Energy Outlook 2006

investment is incremental and where the regulatory framework provides a high
level of assurance to the investor that he will be able to recover his costs through
regulated tariffs. There is nonetheless a danger that the regulator may fix the
allowed rate of return too low, which can discourage investment and create
bottlenecks. In OECD countries, regulated tariffs are generally set so as to
cover the full cost of supply. In some cases, the regulatory regime may
incorporate incentives for utilities to reduce costs – an approach pioneered in
Great Britain. In the vast majority of non-OECD countries, price ceilings that
keep retail prices below the full long-run marginal cost of supply can impede
the capacity of gas utilities – whether private or public – to invest in expanding
and maintaining the network (see the discussion of subsidies in Chapter 11).
This is a major problem in Russia and several other transition economies.
124 World Energy Outlook 2006 - THE REFERENCE SCENARIO
© OECD/IEA, 2007