Price Cap Regulation: Problems and Solutions

The problems of price cap regulation include: the transformation from rate-of-return regulation, the adoption of a price cap formula, cross-subsidization, and the relationship between regulation and competition. The experience of price cap regulation reveals that it does not protect monopoly customers, and it allows utilities to engage in cross-subsidization. These results imply that the regulator must periodically review price cap results to realign prices with the cost of service and to ensure that a level playing field that would nurture competition develops in every market.