Public Utility Regulators are Only Human: A Positive Theory of Rational Constraints

Abstract

Positive models of public-utility regulation should capture personal incentives of regulators. A regulatory objective function is specified by appeal to standard human concerns coupled with politics and processes peculiar to public-utility regulation. Constraints a rational regulator would impose on the firm are thereby derived, and connections between regulatory objectives and regulatory rules illuminated. Results include theoretical rationales for "rate-of-return" regulation in a world of certainty, and a largely neglected type of "rate-of-return" regulation under (symmetric) uncertainty. Other forms of regulation should also be explicable in terms of personal motives of human regulators.

Keywords: Regulation, Public Utility, Incentives, Human Regulators, Rate-of-return

JEL Classification: R38, H83, H30