Price Regulation Under Uncertainty in an Asymmetric Decision Environment

Abstract

A regulated firm that can make decisions both before and after uncertainty is resolved with respect to input use cannot be led to competitive solutions by regulatory price ceilings. Whether those ceilings are imposed before or after the resolution of uncertainty, they present incentives for under capitalized production, contrary to usual AJ assertions. Under these conditions the Fair Return objective is neither a sufficient nor an unambiguous regulatory target.