James Ming Chen


Price-level, or “price-cap,” regulation offers an alluring alternative to the traditional technique of monitoring a regulated firm’s profits. This Article contrasts price-level regulation with conventional cost-of-service ratemaking and with Ramsey pricing. Price-level regulation stands as a market-based, incentive-driven “third way” between traditional regulation and complete deregulation. Although some jurisdictions have set price caps according to operating cost and rate-of-return calculations that clearly parallel those steps in conventional ratemaking, this Article will focus on price-level methodologies that combine an economy-wide measure of inflation with an x-factor reflecting total factor productivity within a regulated industry.

After addressing the simpler component of price-level regulation, the choice of an inflation index, this Article devotes detailed attention to the treatment of the x-factor by two federal ratemaking agencies, the Federal Energy Regulatory Commission (FERC) and the Federal Communications Commission (FCC). Closer examination of price cap methodologies adopted by FERC and the FCC suggests that price-level regulation based on inflation and an industry-specific X factor may be further streamlined. This Article concludes by describing how price-level regulation might be accomplished through the application of a single, industry-specific index of input costs.