Incentive Regulation in Network Industries: Experience and Prospects in the U.S. Telecommunications, Electricity, and Natural Gas Industries

We trace the development of incentive regulation in the U.S. telecommunications, electricity, and natural gas industries. Telecom has moved much more in the direction of pure price cap regulation. Incentive regulation in electricity and gas has generally not strayed far from rate-of-return regulation. Reasons for these differences include differences in regulatory commitment, industry concentration, technological change and productivity growth, service quality concerns, and externalities. We conclude that electricity and gas can evolve to purer forms of price caps as they gain more experience with incentive regulation, and if the unique features of these industries are considered in plan design.