Regulatory reform for diversified public utilities: For better or for worse?

This article examines the difficulties of regulating public utilities which serve both noncompetitive and competitive markets. Problems with the administration of traditional rate of return regulation as utilities have diversified into competitive markets have led regulators to consider adopting alternative forms of regulation that allow the firm and the customers in noncompetitive markets to share in the economic benefits of production, including ‘price cap’ regulation. The article examines the efficacy of price caps as one possible form of regulatory bargain, both as a theoretical ideal and as they have been applied in practice. It also addresses explicitly the nature of another type of regulatory bargain designed to distribute net economic benefits to consumers and the firm.