Information Economics and New Forms of Regulation

The regulation of public utilities is currently undergoing some major changes. These are particularly in evidence in telecommunications, where technological change, competition, and entry are bringing about drastic rethinking in the way telecommunications are regulated. For AT&T Communications, price-cap regulation has now replaced traditional rate-of-return regulation in their interstate long-distance telecommunications business. Price-cap regulation is currently under active consideration for local exchange carriers 1(LECs), at least with regard to the revenues they receive by way of carrier access. In addition, price caps for local telephone service have been proposed in some state commissions. Price caps then may be an idea whose time has come. If this is the case, then the likelihood is that price caps will be extended to the other traditional public utilities—electricity, gas, and water. Already in New Jersey, the Governor’s Task Force on Market-Based Pricing has recommended price-cap regulation for electric utilities. In the event that price-cap regulation is applied to electric utilities, it may be only a matter of time before gas and water utilities become subject to price caps. Thus, the issue of price-cap regulation is relevant not just to telephone companies but also to gas, water, and electric utilities.