Book contents
- Frontmatter
- Contents
- Preface
- About the Authors
- Deregulatory Takings and the Regulatory Contract
- 1 The Nature of the Controversy
- 2 Deregulation and Network Pricing
- 3 Quarantines and Quagmires
- 4 The Regulatory Contract
- 5 Remedies for Breach of the Regulatory Contract
- 6 Takings and the Property of the Regulated Utility
- 7 Just Compensation for Deregulatory Takings
- 8 The Efficient Component-Pricing Rule
- 9 The Market-Determined Efficient Component-Pricing Rule
- 10 Answering the Critics of Efficient Component Pricing
- 11 The Equivalence Principle
- 12 TSLRIC Pricing and the Fallacy of Forward-Looking Costs
- 13 Deregulatory Takings and Efficient Capital Markets
- 14 Limiting Principles for Stranded Cost Recovery
- 15 Deregulation and Managed Competition in Network Industries
- 16 The Tragedy of the Telecommons
- References
- Case Index
- Name Index
- Subject Index
4 - The Regulatory Contract
Published online by Cambridge University Press: 29 October 2009
- Frontmatter
- Contents
- Preface
- About the Authors
- Deregulatory Takings and the Regulatory Contract
- 1 The Nature of the Controversy
- 2 Deregulation and Network Pricing
- 3 Quarantines and Quagmires
- 4 The Regulatory Contract
- 5 Remedies for Breach of the Regulatory Contract
- 6 Takings and the Property of the Regulated Utility
- 7 Just Compensation for Deregulatory Takings
- 8 The Efficient Component-Pricing Rule
- 9 The Market-Determined Efficient Component-Pricing Rule
- 10 Answering the Critics of Efficient Component Pricing
- 11 The Equivalence Principle
- 12 TSLRIC Pricing and the Fallacy of Forward-Looking Costs
- 13 Deregulatory Takings and Efficient Capital Markets
- 14 Limiting Principles for Stranded Cost Recovery
- 15 Deregulation and Managed Competition in Network Industries
- 16 The Tragedy of the Telecommons
- References
- Case Index
- Name Index
- Subject Index
Summary
STATE PUBLIC UTILITY regulation of electric power generation, transmission, and distribution and of local telephony represents a contract between the state and the regulated company. The economic functions of the regulatory contract, as well as the legal duties and remedies associated with it, are identical to those of a contract between private parties.
ECONOMIC FOUNDATIONS OF THE REGULATORY CONTRACT
Consumers and businesses voluntarily participate in a market transaction only if they receive gains from trade—that is, only if the transaction yields positive net benefits for them. A supplier will not invest in a transaction unless he expects the returns from the transaction to cover all economic costs, including a competitive return to invested capital. That principle is summarized in Armen A. Alchian's classic definition of cost: “In economics, the cost of an event is the highest-valued opportunity necessarily forsaken.” The supplier's costs of investing in the transaction include the highest net benefit of all opportunities forgone, known as opportunity cost.
Cost Recovery for Transaction-Specific Investment
Cost recovery is an essential element of contract law. A contract must provide consideration to each of the parties, which implies that those incurring costs must expect to recover those costs, including a return to invested capital. Victor P. Goldberg, for example, has noted of contracts generally:
Suppose that one party has to make a considerable initial investment and that the value of the investment depends on the continuation of the relationship. An employee investing in firm-specific capital is one example; a second would be an electric utility building a plant to serve a particular area. Both will be reluctant to incur the high initial costs without some assurance of subsequent rewards. […]
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- Information
- Deregulatory Takings and the Regulatory ContractThe Competitive Transformation of Network Industries in the United States, pp. 101 - 178Publisher: Cambridge University PressPrint publication year: 1997
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