Table Of ContentPRICE LEVEL REGULATION FOR
DIVERSIFIED PUBLIC UTILITIES
Topics in Regulatory Economics
and Policy Series
Michael A. Crew, Editor
Graduate School of Management
Rutgers University
Newark, New Jersey, U.S.A.
Previously published books in the series:
Rowley, C., Tollison, R., and Tullock, G.:
Political Economy of Rent·Seeking
Frantz, R.: X-Efficiency
Crew, M.: Deregulation and Diversification
of Utilities
Shogren, J.F.: The Political Economy of
Government Regulation
PRICE LEVEL REGULATION FOR
DIVERSIFIED PUBLIC UTILITIES:
AN ASSESSMENT
Jordan Jay Hillman
Northwestern University
School of Law
Ronald R. Braeutigam
Northwestern University
.,
~
Kluwer Academic Publishers
Boston/Dordrecht/London
Distributors for North America:
Kluwer Academic Publishers
101 Philip Drive
Assinippi Park
Norwell, Massachusetts 02061 USA
Distributors for all other countries:
Kluwer Academic Publishers Group
Distribution Centre
Post Office Box 322
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Library of Congress Cataloging-in-Publication Data
Hillman, Jordan Jay.
Price level regulation for diversified public utilities: an
assessment I Jordan Jay Hillman, Ronald R. Braeutigam.
p. cm. - (Topics in regulatory economics and policy series:
5)
Bibliography: p.
Includes index.
ISBN-13: 978-1-4612-8900-5 e-ISBN-13: 978-1-4613-1629-9
001: 10.1007/978-1-4613-1629-9
1. Public utilities-Rates-Law and legislation-United States.
2. Public utilities-United States-Rates. I. Braeutigam, Ronald.
II. Title. III. Series: Topics in regulatory economics and policy;
5.
KF2103.H55 1989
343.7309'1-dc20
[347.30391] 89-34144
CIP
Copyright © 1989 by Kluwer Academic Publishers
Softcover reprint of the hardcover 1s t edition 1989
All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system or transmitted in any form or by any means, mechanical, photocopying, recording,
or otherwise, without the prior written permission of the publisher, Kluwer Academic
Publishers, 101 Philip Drive, Assinippi Park, Norwell, Massachusetts 02061.
Contents
Foreword and Acknowledgements ix
Introduction and Statement of Purpose 1
1
The Inefficacy of Profit Level Regulation for
the Natural Monopoly Markets of Diversified Firms 5
A. AN ECONOMIC OVERVIEW 5
1. Economic Rationale for Regulation 5
2. Economic Goals of Natural Monopoly Regulation 7
3. Incentives Under Rate of Return Regulation 9
B. A LEGAL OVERVIEW 13
1. A View from the MFJ :
A Selective Approach to Intermarket Subsidies 13
2. A View from the FCC:
Cost Allocation and Transfer Pricing 15
3. A View from the States: Transfer Pricing 16
4. The Uses and Abuses of "Stand Alone" Costs 19
5. Regulating the Structure of
Diversified Utilities Under Profit Level Regulation 25
6. Summary: Profit Level Regulation and Diversification 35
v
vi Price Level Regulation for Diversified Public Utilities
2
The Welfare Ingredients of Price Level Regulation:
Incentives and Decisional Options 37
A. THE FIRM'S INCENTIVES
AND THEIR WELFARE IMPLICATIONS 37
B. MAJOR DECISIONAL ISSUES
IN A PRICE LEVEL REGIME 43
1. Defining the Market Scope of a Price Level Regime 43
2. Determining Initial Price Levels 45
a. Aggregate Levels 45
b. Price Relationships 48
3. Price Level Adjustments 49
a. Programmed Adjustments: Inflation and Productivity 49
b. Non-Programmed Adjustments:
Material and Irregular Exogenous Cost Changes 53
c. Adjusting for Differential Costs and Demand Factors 55
4. Price Structure and Relationships:
Aggregate and Disaggregate Ceilings 59
3
Assessing the Efficacy of Price Level Regulation
for the Natural Monopoly Markets of Diversified Firms 63
A. POTENTIAL BENEFITS OF
PRICE LEVEL REGULATION 63
1. Productive Efficiency and
Innovation in Natural Monopoly Markets 63
2. Allocative Efficiency 64
a. Pricing in Natural Monopoly Markets 64
b. Pricing and Output in Unregulated Markets 64
3. Reducing the Costs of Regulation 65
B. POTENTIAL PROBLEMS OF
PRICE LEVEL REGULATION 66
1. Potential Pricing Problems 66
2. Potential Problems of Service Coverage and Quality 68
3. The Potential Problem Of Errant Indices 69
4. Potential Limitations on Efficiency from
Oversight Standards and Monitoring Procedures 73
Price Level Regulation for Diversified Public Utilities Vll
5. Problems in Defining the Constitutional Entitlements
ofInvestors and Consumers Under a Price Level Regime 78
4
Implementing a Price Level Regime
for Diversified Public Utilities 83
A. AS APPLIED TO THE FIRM'S
NATURAL MONOPOLY MARKETS 83
1. Structuring an Efficient Process for Efficacious Decisions 83
2. Maintaining Efficiency Incentives
Through Minimal Recourse to Profit Level Standards 86
B. AS APPLIED TO RELATIONSHIPS BETWEEN
THE DIVERSIFIED FIRM'S REGULATED
AND UNREGULATED MARKETS 90
1. Responsibilities of the Diversified Firm
for the Provision of Natural Monopoly Services 90
2. The Regulator's Antitrust Role
in the Diversified Firm's "Unregulated" Markets 93
Conclusion 97
Endnotes 99
Afterword 131
Index 135
Foreword and Acknowledgements
This book is the final product of a research project sponsored by
the Corporate Counsel Center of the Northwestern University School
of Law. The project was funded through a 1985 grant to the Center
by American Information Technologies Corporation (Ameritech). The
principal condition of the grant was that it be used to support re
search in regulatory matters. Within this broad purpose, the particu
lar subject matter was determined by Professor Hillman, of the Law
School, as principal researcher and Professor Braeutigam, of
Northwestern's Department of Economics, as economic consultant.
These authors appreciate the support provided by Ameritech's grant
to the Center and the complete independence accorded to them in
their work. They also wish to acknowledge the substantial contribu
tions of Messrs. Erik F. Dyhrkopp and Steven M. Spaeth, as law stu
dent research assistants.
A further condition of the grant was that the final results be pre
sented at a Law School conference. This was held on November 18,
1988. Following the principal presentation by Professors Hillman
and Braeutigam, responsive commentaries were made by two aca
demic economists and two academic lawyers. The economists were
Victor P. Goldberg, Thomas Macioce Professor of Law, Co-Director,
Center for Legal and Economic Studies, Columbia University School
of Law and Almarin Phillips, John C. Hower Professor of Public
Policy and Professor of Law and Economics, University of
Pennsylvania. The lawyers were Ian R. Macneil, John Henry
ix
x Price Level Regulation for Diversified Public Utilities
Wigmore Professor of Law, Northwestern University School of Law
and Richard J. Pierce, Jr., George W. Hutchison Professor of Law,
Southern Methodist University.
The inherent complexities and tensions of price level regulation,
whether for diversified or non-diversified public utilities, were under
scored in these responses. The Afterword to the book contains a brief
summary of some of the major points made by three of the commen
tators. Professor Macneil preferred not to have his views stated in
summary form.
PRICE LEVEL REGULATION FOR
DIVERSIFIED PUBLIC UTILITIES
