Alternative decision model for regulating public utilities

Since the US Supreme Court ruling in the Hope Natural Gas case in 1944, the basis for regulation of public utilities has been to allow a fair and equitable rate of return to holders of common equity in the firm. However, the experts on regulation generally disagree on the proper approaches for estimating the important variables as well as the normative guidelines to be used in judging the fairness of regulatory decisions. This article uses the Supreme Court rulings to develop a theoretical, yet pragmatic, concept for utility rate regulation. The proposed model (1) reduces the number and complexity of required before-the-fact estimates, and (2) provides a benchmark for judging the fairness of the return to the equity holder. 14 references.