Regulatory lag fallacy

Journal Article · Thu Aug 14 04:00:00 EDT 1980 · Public Util. Fortn.; (United States)

OSTI ID:6944617

Warren, E

Regulatory lag, the difference between the time when a utility's costs increase and when the utility is allowed to raise its rates, has long been regarded by ratemakers as the primary efficiency incentive for public utilities. A close examination, however, of the unspoken premises behind this theory and the actual results of its application discloses that regulatory lag can have detrimental effects and should not be a part of the regulatory process. Its role as an efficiency incentive is questionable because no functional relationship exists between the amount that inflation may drive up costs and the amount that increased efficiency may reduce them. In fact, as a utility becomes more cost-efficient, it has more to fear from regulatory lag in that it lacks further means of cutting costs during periods of high inflation. Moreover, the pressure caused by regulatory lag provides a strong disincentive for offering to the customer any new or improved service that might increase a utility's costs.

• Research Organization: Univ. of Houston, TX
• OSTI ID: 6944617
• Journal Information: Public Util. Fortn.; (United States), Journal Name: Public Util. Fortn.; (United States) Vol. 106; ISSN PUFNA
• Country of Publication: United States
• Language: English

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