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Price-Level Regulation and Its Reform

63 Pages Posted: 3 Aug 2005 Last revised: 13 Sep 2016

James Ming Chen

Michigan State University - College of Law

Date Written: Summer 2016

Abstract

Price-level, or “price-cap,” regulation offers an alluring alternative to the traditional technique of monitoring a regulated firm’s profits. Part II of this article contrasts price-level regulation with conventional cost-of-service ratemaking and with Ramsey pricing. Price-level regulation stands as a market-based, incentive-driven “third way” between traditional regulation and complete deregulation. Part III provides formal specifications of price-level regulation. Although some jurisdictions have set price caps according to operating cost and rate-of-return calculations that clearly parallel those steps in conventional ratemaking, this article will focus on price-level methodologies that combine an economy-wide measure of inflation with an x-factor reflecting total factor productivity within a regulated industry.

Part IV addresses the simpler component of price-level regulation, the choice of an inflation index. Part V devotes detailed attention to the treatment of the x-factor by two federal ratemaking agencies, the Federal Energy Regulatory Commission (FERC) and the Federal Communications Commission (FCC). Closer examination of price cap methodologies adopted by FERC and the FCC suggests that price-level regulation based on inflation and an industry-specific X factor may be further streamlined. Part VI describes how price-level regulation might be accomplished through the application of a single, industry-specific index of input costs.

Keywords: price-level regulation, price caps, inflation, gross domestic product, x-factor, ratemaking, rate regulation

Suggested Citation

Chen, James Ming, Price-Level Regulation and Its Reform (Summer 2016). Marquette Law Review, Vol. 99, No. 4, 2016; Minnesota Legal Studies Research Paper No. 05-18. Available at SSRN: https://ssrn.com/abstract=771226 or http://dx.doi.org/10.2139/ssrn.771226

James Ming Chen (Contact Author)

Michigan State University - College of Law ( email )

318 Law College Building
East Lansing, MI 48824-1300
United States

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