In this paper, Dr. Jeff D. Makholm charts an empirical method for determining the relative productivity of electricity distribution operations. Such a method can prove useful for calculating a critical component of “price cap” regulatory formulas. Price cap regulation—as opposed to traditional cost-based methods—has become increasingly popular among regulators as a way to streamline the cost of regulation and encourage regulated businesses to seek more efficient methods of operation.

Price cap regulation is already in use in the US telecommunications industry, both at the federal and state level. Abroad, regulators in the UK, Argentina, Australia, and elsewhere have implemented price cap regulation for the privately-owned gas and electric utility companies they regulate.

Dr. Makholm describes in detail the methods for developing Total Factor Productivity (TFP)-based indexes for price cap plans targeted and electricity distribution companies.