Designing superior incentive regulation

Journal Article · Tue Feb 15 04:00:00 EST 1994 · Fortnightly; (United States)

OSTI ID:5192796

Sappington, D E.M.; Weisman, D L

The key to success in designing effective incentive regulation is relatively simple: Anticipate all of the incentives that will ultimately come to bear, and structure regulatory policy in advance to limit any adverse incentives. All is a critical word here. Attention commonly is focused on the incentives a proposed regulatory plan creates for the regulated firm to minimize production costs, diversify into new markets, and so on. While the incentives are important in assessing a regulatory plan, they are only one consideration. It is also critical to analyze the incentives the plan creates for other key players in the regulatory arena, particularly regulators. It is premature to draw any broad conclusions about the success of incentive regulation in the electric power and natural gas industries. While there is reason for optimism, concern remain. Some incentive regulation plans have been abandoned, in part because of: (1) unforeseen exogenous event that could not be administered within the confines of the plan; (2) public opposition to rewarding a utility for the superior performance it should have realized without the promise of financial reward; (3) adverse reaction to utility earnings in excess of those commonly authorized under traditional regulation, and (4) questions about the legality of the plans under state statutes.

• OSTI ID: 5192796
• Journal Information: Fortnightly; (United States), Journal Name: Fortnightly; (United States) Vol. 132:4; ISSN FRTNE8
• Country of Publication: United States
• Language: English

Related Subjects

03 NATURAL GAS
031000 -- Natural Gas-- Legislation & Regulations
29 ENERGY PLANNING, POLICY, AND ECONOMY
296000* -- Energy Planning & Policy-- Electric Power
ELECTRIC UTILITIES
FINANCIAL INCENTIVES
INDUSTRY
NATURAL GAS INDUSTRY
PRICING REGULATIONS
PUBLIC UTILITIES
REGULATIONS
STATE GOVERNMENT