The averch and Johnson analysis of public utility regulation twenty years later

The Averch and Johnson model of a rate-of-return regulated firm seems to have captivated economists and focused their attention on modest technical inefficiency. Pricing distortions, which were revealed by Welliscz, and the incentive for more extreme technical distortions, which was described by Westfield, are not as widely considered or even understood twenty years after the articles appeared. Analysis using uncertainty and dynamic methods has also failed to treat the full range of rate-of-return implications. To do justice to these original contributions more effort is called for in designing new institutions of public utility regulation.