It is time to address incentive regulation, which is the third instrument that regulators use to control market power and address the asymmetry between the government and the operator with respect to objectives and information. In many instances this topic is intertwined with financial analysis, which is the subject of Financial Analysis.
Incentives can be used in several contexts. For example, policymakers in the United States used a quid pro quo incentive when some of the U.S. incumbent local telephone companies were allowed to enter long distance markets only if they first cooperated in opening their local markets to competition. This chapter focuses on incentives related to the regulation of the overall price level of the service provider. First, the basic forms of regulation used to regulate price levels are addressed. Then the underlying principles of incentive regulation are explained, and how each form of regulation addresses those principles is summarized. How each form of regulation is implemented and the issues that regulators face is reviewed, followed by describing the regulatory processes used to review overall price levels. Following this section’s narrative is a list of case studies and lists of references. References are organized by topic.