Recommendations and Conclusion
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The incentive problem confronting utility regulators has many dimensions, and regulators have many levers by which they can affect the firm’s incentives. This book has presented a general framework for thinking about how the regulator can motivate a self-interested firm to operate and price efficiently. I have focused on how regulators can create incentives by the sharing of changes in the firm’s profits. In traditional, cost-of-service regulation, sharing comes through regulatory lag and the time value of delays in adjusting rates to reflect expenditures. Incentive regulation is an incremental change to that policy, making the sharing more formal and increasing regulator’s commitment to let the firm keep a share of its gains.
KeywordsIncentive Effect Incentive Regulation Incentive Problem Monopoly Price Price Efficiency
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