Price Caps, Rate-of-Return Regulation, and the Cost of Capital

the rule is RPI + K, where K represents both expected productivity gains and a permitted annual increase in the real price of water to allow for quality improvements (think of it as RPI – X + Q, where Q stands for the quality improvement). Since 1989, price caps have also been used in the United States to adjust the prices charged by the long-distance telephone company AT&T. In New Zealand, a price cap is used to adjust Telecom New Zealand’s rental charge for a residential phone line. Price caps are also used in some developing countries. Malaysia, Mexico, and Peru, for example, use them for telecommunications, and Argentina uses them for gas and electricity as well.