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Price-Based Regulation: The Elegance of Simplicity

Fortnightly Magazine - January 15 1996

Public Service Commission and a former president of the National Association of Regulatory Utility Commissioners. He is now in national and international practice as an attorney and regulatory consultant based in Missouri.

Tools for Transition

Price-Driven Alternatives to Traditional Regulation

Rate Moratoria

During the transition to a competitive market, a simple moratorium on rate increases protects customers and gives management an incentive to reduce costs. A moratorium also protects the utility from the risk that regulators might order a rate cut, leaving the utility less able to recover stranded costs.

Price Caps

Price caps break the link between rates and rate base and change the focus from book accounting costs to prices. Changes in price are constrained by an agreed-upon price index, coupled with a productivity offset that assumes (and thereby gives incentive for) annual improvements in productivity and efficiency.*

Target Market Prices

Establish a target year by which rates must achieve the "market" level. Regulators set the market price (or the "target market") based on available forecasts, then mandate a gradual "phase-in" of rates toward that target market. (Such a program should allow lower-cost utilities to raise rates to the target market price in each phase. Otherwise, lower-cost utilities will be at an unfair disadvantage in attracting capital.) The target year and the number and length of "phases" could reflect the time needed to recover legitimate stranded costs.

*See, Olsen, and Costello, "Electricity Matters: A New Incentives Approach for a Changing Industry." The Electricity Journal, January/February 1995, pages 28-40.

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