Price Caps and Revenue Caps: Incentives and Disincentives for Efficiency

Abstract

This paper is concerned with the application of incentive regulation in the electric utility industry in the United States. With increased competition in this industry traditional cost-of-service regulation is increasingly inefficient and unsustainable. The new developments will require the introduction of regulatory schemes that provide greater incentives for efficiency and at minimum eliminate some of the incentives for inefficiency present in existing regulation. In approaching the problem, we will draw not only upon existing regulatory schemes in the United States but also on the experience in the United Kingdom which involved the universal adoption of price cap regulation (PCR).