Inflation and Regulatory Lag

Regulatory lag is that time between a utility's request for new rates and the granting of the rates by utility commissions. The impact of inflation and regulatory lag is presented. The relationships between regulatory lag, asset life, construction costs and utility return requirements are examined with implications for utility management, shareholders and consumers. Possible solutions to the problem of regulatory lag result. A major conclusion is that regulatory lag causes utility managers to act inefficiently and increase consumer costs to the point where the elimination of regulatory lag would be beneficial to consumers as well as investors.