Price Cap Path

At the time of the price cap review, a regulated firm might be earning excessive or inadequate returns. The regulator must make a determination regarding where to re-set the starting price for the new price cap formula. Sometimes a glide path is established to maintain incentives for cost containment during the last stages of a price control. Alternatively, a discrete price adjustment (or One-Off approach) is used to quickly re-set the price at a level where expected returns are not excessive (or inadequate).