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

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Author Info
Paul L. Joskow

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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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Publisher 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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  1. Jamasb, T. & Pollitt, M.G. & Triebs, T., 2008. "Productivity and Efficiency of US Gas Transmission Companies: A European Regulatory Perspective," Cambridge Working Papers in Economics 0812, Faculty of Economics, University of Cambridge. [Downloadable!]
    Other versions:
  2. Paul L Joskow, 2005. "Incentive Regulation In Theory And Practice - Electricity Distribution And Transmission Networks," Working Papers 0514, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research. [Downloadable!]
    Other versions:
  3. Doucet, J. & Littlechild, S., 2006. "Negotiated Settlements: The development of economic and legal thinking," Cambridge Working Papers in Economics 0622, Faculty of Economics, University of Cambridge. [Downloadable!]
  4. David P. Baron, 1978. "Price Regulation, Quality, and Asymmetric Information," Discussion Papers 359, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  5. David P. Baron & Raymond R. De Bondt, 1980. "Factor Price Changes," Discussion Papers 417, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
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This page was last updated on 2009-12-9.

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