TOWARD IMPROVED AND PRACTICAL INCENTIVE REGULATION

The first half of this paper overviews traditional methods of ratemaking-embedded and marginal cost pricing-and four recent alternatives-automatic rate adjustments, profit-sharing, tariff menus, and the Vogelsang-Finsinger convergence mechanism-that have come to challenge them. We develop a list of nine desirable properties that are suitable to gauge any regulatory mechanism. In the second half of the paper, we explore in greater detail two recent incentive plans-the FCC's price caps approach and a mechanism that the three authors proposed in a FERC document. Based on the nine properties, these two mechanisms are compared. © 1991 Kluwer Academic Publishers.