Incentive Regulation for Public Utilities.

• Author: Atkinson, Scott E.

This book, which is a compilation of papers presented at two seminars at Rutgers University, presents a wide range of generally high quality papers on the subject of incentive regulation for public utilities. In general, the papers are not highly theoretical, and some focus almost exclusively on policy issues. While a few of the contributions do not appear to fit the general topic very well, most of the papers will be found informative by economists who are new to the field of incentive regulation. This is even true for the last article, which presents much useful policy information, but adopts a controversial definition of total factor productivity growth. However, those with extensive backgrounds may not find enough to justify the relatively high price of this book.

The first chapter presents a useful overview of the basic elements and alternative forms of incentive regulation. The summary of implementation, though sparse, is encouraging for incentive regulation as an alternative to rate of return regulation.

Chapter two then logically attempts to explain why only two states have utilized incentive regulation in the form of price caps in the telecommunications industry. The fundamental reasons presented are the inherent weaknesses in the application of price cap formulas, structural differences in relevant markets, and political advantages associated with social contracts. Typically, price caps equal the rate of inflation net of economy-wide productivity growth estimates. However, these estimates may inaccurately reflect performance in specific industries. Instead, social contracts, in the form of rate freezes and network modernization may be more politically palatable.

Chapter three addresses the problem that while price cap and rate-of-return regulation may be optimal in static settings, they may be inappropriate in dynamic environments, where differential rates of growth across products may cause pricing distortions. This chapter is more innovative than the previous two and shows that while usage-based pricing schemes cannot easily be revenue neutral in a static environment, they can be profitable in a dynamic one.

The fourth chapter is the most mathematically intensive contribution of the collection. The authors address the topic of regulators imputing prices for a vertically integrated firm which provides inputs to itself for the production of a downstream product. The authors show that the use of an externally determined price for...