Imrecon

Ian Rowson realised early in his work with regulators that:

• like risk, incentives are about what happens when outturns are different from expectations
• analysing incentives requires analysing the effects of uncertain outturns
• the techniques of risk analysis add new depth to the assessment of incentive policy

Imrecon pioneered the use of simulation approaches for incentive regulation in 2002 (for a critique of the CAA's proposed price path commitment approach) and has since developed a number of techniques based on Monte Carlo simulation to provide useful insights quickly and simply.  Imrecon's simulation modelling is now typically based on relatively small, high-level strategic models of the underlying sector economics and the regulated environment over a number of regulatory control periods.

Uses

Policy simulation modelling can:

• be focused on specific issues or an entire regime
• be for diagnosis, the development of policy options or impact assessment
• inform the thinking process of policy makers and inform consultation
• generate metrics and graphics useful for comparing and communicating

Imrecon has used policy simulation techniques for:

• diagnosing regimes
• informing the design of incentive mechanisms
• describing the impact of regulatory price reviews on financial risk and financial indicators
• decomposing systematic risk in a regulated group to derive separate asset beta estimates for individual regulated businesses