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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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  • Paul L. Joskow, 1972. "The Determination of the Allowed Rate of Return in a Formal Regulatory Hearing," Bell Journal of Economics, The RAND Corporation, vol. 3(2), pages 632-644, Autumn.
    • Handle: RePEc:rje:bellje:v:3:y:1972:i:autumn:p:632-644
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    Cited by:

    1. Louis Alessi, 1974. "Aneconomic analysis of government ownership and reculation," Public Choice, Springer, vol. 19(1), pages 1-42, September.
    2. Michael R. Caputo & Dmitriy Popov, 2014. "Comparative Statics Of A Monopolistic Firm Facing Rate-Of-Return And Command-And-Control Pollution Constraints," Bulletin of Economic Research, Wiley Blackwell, vol. 66(S1), pages 17-35, December.
    3. William Dougan, 1984. "Railway abandonments, cross-subsidies, and the theory of regulation," Public Choice, Springer, vol. 44(2), pages 297-305, January.
    4. 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.
    5. Daowei Zhang & David Laband, 2005. "From Senators to the President: Solve the lumber problem or else," Public Choice, Springer, vol. 123(3), pages 393-410, June.
    6. Crone, Lisa & Tschirhart, John, 1998. "Separating economic from political influences on government decisions," Journal of Economic Behavior & Organization, Elsevier, vol. 35(4), pages 405-425, May.
    7. Paul L. Joskow, 2014. "Incentive Regulation in Theory and Practice: Electricity Distribution and Transmission Networks," NBER Chapters, in: Economic Regulation and Its Reform: What Have We Learned?, pages 291-344, National Bureau of Economic Research, Inc.
    8. Francesc Trillas Jané, 2016. "Behavioral Regulatory Agencies," Working Papers wpdea1606, Department of Applied Economics at Universitat Autonoma of Barcelona.
    9. Doucet, Joseph & Littlechild, Stephen, 2006. "Negotiated settlements: The development of legal and economic thinking," Utilities Policy, Elsevier, vol. 14(4), pages 266-277, December.
    10. David P. Baron, 1978. "Price Regulation, Quality, and Asymmetric Information," Discussion Papers 359, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    11. Jamasb, Tooraj & Pollitt, Michael & Triebs, Thomas, 2008. "Productivity and efficiency of US gas transmission companies: A European regulatory perspective," Energy Policy, Elsevier, vol. 36(9), pages 3398-3412, September.
    12. Banks, Jeffrey S, 1992. "Monopoly Pricing and Regulatory Oversight," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(1), pages 203-233, Spring.
    13. Carlos Perez Montes, 2012. "Regulatory bias in the price structure of local telephone services," Working Papers 1201, Banco de España.
    14. 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.
    15. 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.
    16. Paul L. Joskow & Roger G. Noll, 1981. "Regulation in Theory and Practice: An Overview," NBER Chapters, in: Studies in Public Regulation, pages 1-78, National Bureau of Economic Research, Inc.
    17. 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.
    18. Chakravorty, Shourjo, 2020. "The association between a regulated utility's allowed revenue increase and future operating cost: Some evidence from Florida," Utilities Policy, Elsevier, vol. 64(C).
    19. 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.
    20. 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.
    21. Rode, David C. & Fischbeck, Paul S., 2019. "Regulated equity returns: A puzzle," Energy Policy, Elsevier, vol. 133(C).
    22. Lemus Torres, Ana Belén & Moreno, Diego, 2014. "Price caps regulation with capacity precommitment," UC3M Working papers. Economics we1309, Universidad Carlos III de Madrid. Departamento de Economía.
    23. Lemus, Ana B. & Moreno, Diego, 2017. "Price caps with capacity precommitment," International Journal of Industrial Organization, Elsevier, vol. 50(C), pages 131-158.
    24. 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.
    25. Knittel, Christopher R. & Metaxoglou, Konstantinos & Trindade, André, 2019. "Environmental implications of market structure: Shale gas and electricity markets," International Journal of Industrial Organization, Elsevier, vol. 63(C), pages 511-550.

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