Question

Discuss the alternatives to both incentive regulation and rate of return regulation.

Hybrid regulatory plans

Answer 1

Incentive regulation is generally executed by controlling the overall price level of the operator. There are four basic methids to executing overall price levels. The first approach is commonly called rate of return regulation or cost of service regulation. This regulatory method demonstrates an overall price level that permits the operator to receive accounting benefits that are just equal to the operator’s cost of capital at the time the price level is set. Actual profits may different from the cost of capital until the next time the regulator analysis the operator’s profits.

The second method is called price cap regulation or RPI-X regulation, which is a method that provides the operator’s overall price level by indexing the price level according to inflation minus an offset, called an X-factor.

The third method to analysing the overall price level is called revenue caps. This is related to price caps beside that the inflation-minus-X formula execute to revenue rather than prices.

The fourth method is called benchmarking or yardstick regulation. This type of regulation gives competition between markets by contrasting operators across markets, in result forcing the operator to compete against the performance of comparable operators in other markets.

Many regulators acquire hybrid incentive schemes, which are methods that joint features of the three fundamental methods of incentive regulation described above.

Another method for joining elements of rate of return regulation and price or revenue cap regulation is to involve pass through elements in the scheme.