Automatic-adjustment clauses and allocative efficiency in public utilities
- State Univ. of New York, Binghamton
This paper presents a formal analysis of the efficiency effects of automatic-adjustment clauses (AACs) in regulated industries. Using a two-imput model of ex ante/ex post input choice and general putty-clay technology, the authors analyze the relative extent of allocative distortions due to each of three alternative regulatory policies (periodic rate review with and without an AAC, and an AAC without any rate review) for the case of a regulated firm that chooses an ex post technology to maximize the present value of future profits. Results indicate that the economic rationale for using AACs in industries already subject to intermittent rate review is not unambiguous, even in the face of severe cost inflation, and is particularly sensitive to the magnitude of the price elasticity of demand for output and the rate and direction of input price changes. It is concluded that the use of AACs in regulated industries such as electric power, while originally justified on the basis of financial viability, may well carry significant economic costs in the form of allocative inefficiency that may outweight the benefits. 49 references, 3 figures, 1 table.
- OSTI ID:
- 6544752
- Journal Information:
- J. Econ. Bus.; (United States), Journal Name: J. Econ. Bus.; (United States) Vol. 34:4; ISSN JEBUD
- Country of Publication:
- United States
- Language:
- English
Similar Records
Encouraging the installation of pollution control equipment: the use of automatic adjustment clauses
Rate reform advocates target: The adjustment clause