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The Determination of the Allowed Rate of Return in a Formal Regulatory Hearing

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  • Paul L. Joskow

Abstract

This paper presents an attempt to specify and estimate a simple model of the rate of return phase of a formal regulatory hearing. The specification of the model derives from the author's intensive study of the regulatory decision-making process in New York State. Although well-defined legal rules for the calculation of the allowed rate of return have not evolved in most regulatory jurisdictions, the results indicate that the regulatory agency, in a consistent fashion, makes use of the information provided to it in the regulatory hearing. The rate of return allowed by the commission is shown to depend on the size and relative reasonableness of the firm's request, the presence or absence of cost of capital testimony supporting the firm's request, the presence or absence of intervenors presenting conflicting rate of return testimony, the type of firm making the rate of return request, and a subjective evaluation of the efficiency of the firm making the request. The results also suggest that commission behavior changes in response to problems faced by the regulatory process in a world characterized by rapid inflation.

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Bibliographic Info

Article provided by The RAND Corporation in its journal Bell Journal of Economics.

Volume (Year): 3 (1972)
Issue (Month): 2 (Autumn)
Pages: 632-644

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Handle: RePEc:rje:bellje:v:3:y:1972:i:autumn:p:632-644

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Cited by:
  1. Upadhyaya, Kamal P. & Raymond, Jeannie E. & Mixon, Franklin Jr., 1997. "The economic theory of regulation versus alternative theories for the electric utilities industry: A simultaneous probit model," Resource and Energy Economics, Elsevier, vol. 19(3), pages 191-202, August.
  2. Todd Kunioka & Lawrence S. Rothenberg, 1993. "The politics of bureaucratic competition: The case of natural resource policy," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 12(4), pages 700-725.
  3. Mirucki, Jean, 1980. "Comportement de l'entreprise réglementée: étude de l'hypothèse Averch-Johnson
    [Behavior of the Regulated Firm: A Study of the Averch-Johnson Hypothesis]
    ," MPRA Paper 27669, University Library of Munich, Germany, revised 1982.
  4. Mirucki, Jean, 1980. "Vérification des conditions d'efficacité dans la production chez Bell Canada
    [Checking the conditions of efficient production in Bell Canada]
    ," MPRA Paper 30147, University Library of Munich, Germany, revised Jun 1980.
  5. Richard Barke & William Riker, 1982. "A political theory of regulation with some observations on railway abandonments," Public Choice, Springer, vol. 39(1), pages 73-106, January.
  6. Pérez Montes, Carlos, 2013. "Regulatory bias in the price structure of local telephone service," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 462-476.
  7. William Dougan, 1984. "Railway abandonments, cross-subsidies, and the theory of regulation," Public Choice, Springer, vol. 44(2), pages 297-305, January.

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