Abstract
We present a price cap mechanism, which features an external standard, constructed to elicit efficient utility performance. We focus on a method for setting the external standard, which is usually based on industry total factor productivity (TFP), when 'peer' data are not readily available. The procedure is based on an econometric cost model and externalizes the performance target or TFP by using a combination of industry and individual utility data. To highlight the importance of the method, we profile the approach that was considered and partly adopted in the current incentive regulation plan of Ontario's gas distribution industry.
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