Firm-Specific Productive Efficiency Offsets in the Development of a Price Cap Formula

Abstract Performance-based regulation represents an improvement over traditional rate-of-return regulation, but the price cap formulas that are employed often do not include firm-specific—as opposed to industry-wide—productivity or efficiency differentials and therefore do not include offsets related to the historical performance of the utility itself in the typical PCF. The authors show how to compute such offsets.