On the design of regulatory price adjustment mechanisms |
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Authors: | David P Baron Raymond R De Bondt |
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Affiliation: | Northwestern University, Evanston, Illinois 60201, USA;Katholieke Universiteit Leuven, Leuven, Belgium |
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Abstract: | Price adjustment mechanisms are employed in the electric utility industry to pass changes in fuel costs on to consumers without formal rate review by a regulatory commission. The predictability of this pass-through and the regulator's limited ability to observe the actions of a firm can create potential incentive problems associated with the choices of technology and fuel supply. This paper is concerned with the regulatory design of pass-through formulas when a factor price is uncertain. The optimal design involves deviating from the full-information optimal price formulas in order to mitigate the incentive problems. |
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