Toward improved and practical incentive regulation

Abstract

AbetactThe first half of this paper overviews traditional methods of ratemaking--embedded and marginal cost pricing--and four recent alternatives--automatic rate adjustments, profit-sharing, tariff menus, and the Vogelsang-Finsinger convergence mechanism--that have come to challenge them. We develop a list of nine desirable properties that are suitable to gauge any regulatory mechanism. In the second half of the paper, we explore in greater detail two recent incentive plans--the FCC's price caps approach and a mechanism that the three authors proposed in a FERC document. Based on the nine properties, these two mechanisms are compared.

Explaining the Choice Among Regulatory Plans in the U.S. Telecommunications Industry

“…2. See, for example, Averch and Johnson (1962), Baumol and Klevorick (1970), Joskow and Schmalensee (1986), Beesley and Littlechild (1989), Cabral and Riordan (1989), Braeutigam and Panzar (1989), Lewis and Sappington (1989), Schmalensee (1989), Brown et al (1991), Liston (1993), Weisman (1993), Gasmi et al (1994), and Sappington and Weisman (1994~).…”

Financial Transmission Rights

“…The transmission cost function c(q,K) reflects the sunk cost nature of transmission investment and has the following form: 18 Brown et al (1991). 19 Vogelsang (1999).…”

Different Approaches Towards Electricity Transmission Expansion

“…Applied price-cap mechanisms can be analyzed from two perspectives: regulation of "price level" and regulation of "price structure" (see Brown, Einhorn, and Vogelsang, 1991). Price level regulation refers to the long-run distribution of rents and risks between consumers and the regulated firm.…”