PRICE REGULATION AND INCENTIVES* by

I would like to thank the editors and Dennis Weisman for helpful comments and Dawn Goodrich, Salvador Martinez and Maria Luisa Corton for excellent research assistance. I would also like to thank my colleagues Sanford Berg and Mark Jamison and participants in their International Training Program on Utility Regulation and Strategy for many helpful conversations and insights. I am especially grateful to Dennis Weisman, who has taught me a great deal about incentive regulation during our many collaborations. Much of the discussion in this chapter draws heavily from our joint work.- 1-1. Sappington (1994) provides an alternative definition of incentive regulation, and stresses that rate of return regulation, like its alternatives, provides meaningful incentives to the regulated firm. 2. The influence of Sappington and Weisman (1996a) and Bernstein et al. (1996), and thus my coauthors, on the ensuing discussion will be apparent. Their many insights are greatly appreciated. 1. Introduction