Revenue Cap

Similar to a price cap, except the constraint is placed on total revenue rather than a particular price or basket of prices. The formula can include an inflation adjustment and an efficiency (or, X) factor. In the case of electricity, the distribution or transmission company is not harmed financially when consumers engage in energy conservation. Such caps provide a disincentive for increasing quantity sold (perhaps through quality enhancements) since such developments do not benefit firms under a Revenue Cap. This regulatory mechanism is often applied to links in a network, where most of the costs are fixed in nature.