Toward Improved and Practical Incentive Regulation
The first half of this paper overviews traditional methods of rate-making--embedded and marginal cost pricing--and four recent alternatives--automatic rate adjustments, profit-sharing, tariff menus, and the Vogelsang-Finsinger convergence mechanism--that have come to challenge them. The authors develop a list of nine desirable properties that are suitable to gauge any regulatory mechanism. In the second half of the paper, they explore in greater detail two recent incentive plans--the FCC's price caps approach and a mechanism that the three authors proposed in a FERC document. Based on the nine properties, these two mechanisms are compared. Copyright 1991 by Kluwer Academic Publishers
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