The price cap plan for regulating local exchange carriers in the USA Online publication date: Mon, 21-Mar-2005
by Noel D. Uri, Florence O. Setzer
International Journal of Services Technology and Management (IJSTM), Vol. 6, No. 1, 2005
Abstract: In 1991, the FCC implemented a price cap plan designed to deal with the regulatory boundaries problem arising from the dissolution of AT&T in 1984. The experience with the price cap plan demonstrates the difficulty of predicting productivity growth accurately, and makes it clear that regulators cannot depend upon a pure price cap plan to keep prices within a reasonable range of cost. With periodic reviews to readjust plan parameters, however, a price cap plan can maintain rates of return close to the target rate of return, without diminishing the price cap plan's incentives for efficient production. A simple method of recalculating the X-factor based on the rates of return over the previous three years worked well in simulations. If this procedure had been used over the price cap period 1991 to 2000, prices would have been 20% lower, and expenditures on LECs' telecommunications services subject to price caps would have been $3.8 billion lower.
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