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On the incentive properties of revenue cap regulation

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  • Weisman, Dennis L.

Abstract

Revenue cap regulation (RCR) is increasingly common in the energy sector because it purportedly reduces the regulated firm's disincentive to promote conservation. In comparison with price-cap regulation, RCR can yield higher prices, greater energy conservation, lower service quality and decreased cost-reducing innovation. The distortionary effects of earnings sharing on investment in cost-reducing innovation may be lessened under RCR. These properties hold even when the regulated firm is further constrained with a price cap that is set equal to the minimum price that satisfies the RCR constraint.

Suggested Citation

  • Weisman, Dennis L., 2025. "On the incentive properties of revenue cap regulation," Energy Economics, Elsevier, vol. 141(C).
    • Handle: RePEc:eee:eneeco:v:141:y:2025:i:c:s0140988324007618
    DOI: 10.1016/j.eneco.2024.108052
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    References listed on IDEAS

    as
    1. Lantz, Björn, 2008. "Hybrid revenue caps and incentive regulation," Energy Economics, Elsevier, vol. 30(3), pages 688-695, May.
    2. David E. M. Sappington & Dennis L. Weisman, 2016. "The disparate adoption of price cap regulation in the U.S. telecommunications and electricity sectors," Journal of Regulatory Economics, Springer, vol. 49(2), pages 250-264, April.
    3. David E. M. Sappington & Dennis L. Weisman, 2024. "40 Years of Incentive Regulation: What Have We Learned, and What Questions Remain?," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 65(2), pages 361-373, September.
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    5. Sappington, David E.M., 2024. "Optimal revenue adjustment in the presence of exogenous demand variation," Energy Economics, Elsevier, vol. 131(C).
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    8. Daniel Duma & Michael G. Pollitt & Andrei Covatariu, 2024. "Regulatory Learning in the Face of Net Zero Climate Policy: The Case of the UK," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 65(2), pages 505-530, September.
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    11. David Sappington & Dennis Weisman, 2010. "Price cap regulation: what have we learned from 25 years of experience in the telecommunications industry?," Journal of Regulatory Economics, Springer, vol. 38(3), pages 227-257, December.
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    More about this item

    Keywords

    Price caps; Revenue caps; Incentives; Conservation; Efficiency;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

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