Designing Price Caps for Gas Distribution Systems.

We examine the applicability of price-cap mechanisms to the regulation of gas distribution company rates for gas supply and transportation services. Although distribution companies will continue to be regulated for the foreseeable future, we argue that a hybrid of price and profit regulation of transportation rates will increase allocative efficiency and provide greater incentives for productive efficiency. The design of incentives for cost minimization in long-term gas supply contracts is more challenging, but an index cap, based on the cost of gas acquired by other distribution companies, merits attention. Copyright 1991 by Kluwer Academic Publishers