Rate-of-Return and Price-Cap Regulations for Urban Railways

We buid a simple model of commuter railways where congestion exists, show that price-cap (PC) regulation causes congestion compared to rate-of-return (ROR) regulation. We next consider methods to correct it, and show the following results: (i) PC regulation, in which the cap is made contingent on congestion, can correct the congestion without distorting cost-reducing efforts, (ii) PC regulation, in which the cap depends on investment in transportation capacity, can also correct the congestion but distorts cost-reducing efforts. We demonstrate these results by simulation, based on data from the Tokyu To-Yoko line in the Tokyo Metropolitan Area.