Regulatory Lag Research Articles

Efficiency Incentives and Cost Factors in Public Utility Automatic Revenue Adjustment Clauses

Historically, productivity advances in the public utility sector have been high, substantially mitigating the impact of inflation on operating costs. However, today's high rates of inflation, coupled with regulatory lag, have resulted in profit erosion which impacts adversely on the utility's ability to attract new investor capital. One possible solution to this problem is the two-way automatic revenue adjustment clause, coupled with an incentive to higher efficiency. Several automatic revenue adjustment clauses, proposed or in operation, are reviewed by the author, with emphasis on the cost and efficiency adjustment clause. If a utility maintains its total productivity at the level of the prior period, this adjustment clause permits half the increase in unit costs to be recovered automatically; the other half may be passed on to the extent the company is able to increase its productivity. The author also suggests several alternative formulas incorporating efficiency incentives.

Rate of Return, Rate Base and Regulatory Lag under Conditions of Changing Capital Costs

Rate of Return, Rate Base and Regulatory Lag under Conditions of Changing Capital Costs

Effluent Charges: A Critique

Effluent Charges: A Critique. This paper argues that the case for effluent charges as a solution to environmental problems has been substantially overstated mainly because of a general failure to confront the numerous complexities generated by any real world application of the charge technique. The paper considers problems raised by costs of information, regulatory lag, capital intensity of pollution investment, collusive behaviour by dischargers, discontinuities in marginal cost and benefit schedules, as well as the difficulty of setting optimal charges when polluters' marginal damage functions differ and when joint treatment among dischargers is an efficient outcome.

Required Rate of Return for Equity Capital under Conditions of Growth and Consideration of Regulatory Lag

The purpose of this study is to extend the empirical analysis of Thompson (1979) to generate individual company costs of equity capital from statistical analysis of cross-sectional industry data. The paper uses a new random coefficients regression ...

The Behavior of a Firm Subject to Stochastic Regulatory Review

In recent years, the behavior of regulated public utilities has received increasing attention from economic theorists. The principal structure used in analyzing this behavior has been the Averch-Johnson model of the regulated firm. The current paper presents an alternative view of the regulated firm, one which attempts to narrow some (though by no means all) of the gaps between the now standard model and the actual regulatory process. In particular, the new model proposed here considers the firm's operations in a dynamic context -- with the firm looking to the future in making today's decisions -- and it incorporates the interplay between the regulatory agency and the firm. The model captures the price-setting role of the regulators, and it encompasses the phenomenon of regulatory lag. The uncertainty associated with the occurrence of rate reviews is modeled by positing that reviews occur stochastically through time. And, although the treatment of the issue is rather simplistic, the model does incorporate technical change generated by the regulated firm's program of research and development. The regulated firm's optimal policy is characterized, and the implications this optimal policy has for two traditional issues in regulatory economics -- the input efficiency of regulated firms and the effect of regulatory lag on research and development -- are examined.

Incentive Pricing and Utility Regulation

X-Efficiency, 236. — Incentive pricing, 243. — Incentive pricing applied to regulated utilities, 244. — Calibration, 247. — The regulatory lag, 251. — Conclusion,

Input Choices and Rate-of-Return Regulation: An Overview of the Discussion

This article reviews the substance of the literature stemming from the Averch-Johnson model of the firm under rate-of-return regulation. It examines a number of propositions, among them the following: (1) The profit-maximizing firm under rate-of-return regulation will tend to use a capital-labor ratio greater than that which minimizes cost for its output level; (2) The profit-maximizing firm under regulatory constraint will use a capital-labor ratio and produce an output greater than it would in the absence of regulation; (3) The closer the fair rate of return is to the true cost of capital, the greater the quantity of capital the firm will want to use; and (4) The sales (total revenue)-maximizing firm under regulatory constraint will use a labor-capital ratio greater than it would when unconstrained. The second of these propositions, which has been widely taken to have been proved by Averch and Johnson, is shown to be false. The paradoxical assertion in the third proposition is explained and its regulatory implications discussed. Two models involving regulatory lag are described along with their implications for policy. Finally, some evaluative comments are offered on the entire issue of what has come to be known as the A-J effect and its importance in regulatory economics.