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


  • Paul L. Joskow


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.

Suggested Citation

  • 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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    References listed on IDEAS

    1. Westfield, Fred M, 1971. "Methodology of Evaluating Economic Regulation," American Economic Review, American Economic Association, vol. 61(2), pages 211-217, May.
    2. MacAvoy, Paul W, 1971. "The Regulation-Induced Shortage of Natural Gas," Journal of Law and Economics, University of Chicago Press, vol. 14(1), pages 167-199, April.
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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. William Dougan, 1984. "Railway abandonments, cross-subsidies, and the theory of regulation," Public Choice, Springer, vol. 44(2), pages 297-305, January.
    3. 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.
    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. 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.
    6. 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.
    7. 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.
    8. Francesc Trillas Jané, 2016. "Behavioral Regulatory Agencies," Working Papers wpdea1606, Department of Applied Economics at Universitat Autonoma of Barcelona.
    9. Lemus, Ana B. & Moreno, Diego, 2017. "Price caps with capacity precommitment," International Journal of Industrial Organization, Elsevier, vol. 50(C), pages 131-158.
    10. 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.

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