Abstract
Price cap regulation (PCR) arose out of dissatisfaction with rate-of-return regulation (ROR). In energy and water there has been a move away from PCR into an extended form of ROR, referred to as guaranteed return regulation (GRR). It is employed to implement policies that legislators are unwilling to apply by transparent methods, namely taxation, but willing to apply opaquely through the regulatory process. GRR does not promote efficiency and, as the California experience shows, the guarantees it provides are limited. Its success in California has been mixed and it should be considered to be a work in progress and open to improvements, some of which are outlined.
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