A note on price cap regulation and competition

This paper examines the properties of a price-cap regulatory regime similar in design to a plan recently proposed by AGT Ltd. in hearings on Alternative Forms of Regulation before the Canadian Radio-television and Telecommunications Commission. The price-cap plan incorporates a number of novel features which include (i) quantity weights that evolve through time rather than remaining fixed; (ii) adjustments for productivity that incorporate yardstick competition; and (iii) allowing the weights to reflect the firm's market power or absence thereof in the presence of competition. Hence, should competitive circumstances permit, the regulatory regime allows for its own sunset.