Performance-based regulation for electric utilities is now a foreseeable-future reality in the United States, and in many cases some form of a price cap is likely to be its modus operandi. Viewing electricity in a multi-product constext, a utility that is constrained by a price cap will likely see either its exogenous sales mix change over time within any customer class or different rates of sales growth among its customer classes. In either event, the unintended and adverse effect may be a change in the utility's average rate level that results in a price-cap violation. Starting from a base-year average rate and moving on to the future, the traditional (RPI-X) price-cap percentage adjustment provides the utility with a new and violation-prone price cap. We show that the addition of a specific monetary value to that percentage adjustment will negate any possibility of an unintended price-cap violation, and thus help the utility stay financially sound. We also show how to compute that value from data that are readily available to the utility. We do this in the spirit of helping regulators worldwide to restructure energy markets along the competitive lines so as to enhance consumer welfare. In a wider context, this price-cap formulation is potentially applicable to price-cap regulation in other types of industries that have a multi-product and/or a multiple customer-class context. Copyright © 2001 Elsevier Science Ltd. All rights reserved.
CitationSeeto, D. Q., Woo, C. K., & Horowitz, I. (2001). Finessing the unintended outcomes of price-cap adjustments: An electric utility multi-product perspective. Energy Policy, 29(13), 1111-1118. doi: 10.1016/S0301-4215(01)00048-9
- Performance-based regulation
- Price caps
- Cost recovery