Abstract
A regulatory framework is considered in which output price adjustments can be initiated only by a change in the price of a non-capital input (e.g. fuel) at some time in the future which is uncertain. At that time there is a processing period and then an adjustment of the output price so that the revenues of the firm meet an allowed rate of return s. The regulated firm choosing a putty-clay technology is shown to overcapitalize for large values of s and to undercapitalize for sufficiently small values of s. A decrease in the length of the processing period is found to accentuate the extent of either the undercapitalization or overcapitalization resulting from the specified rate of return.
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