A regulatory bargain for diversified enterprises

This paper examines an alternative to traditional rate of return regulation and price cap regulation for public utilities which serve both non-competitive and competitive markets. The alternative is a regulatory bargain in which the allowed economic profit for the firm is tied to the level of net economic benefits (consumer surplus) accruing to the customers in non- competitive markets. Among other things, this form of regulation is shown to lead to cost minimizing production, efficient pricing in competitive and non-competitive markets, diversification into competitive markets if and only if there are economies of scope, and protection of customers in non-competitive markets from economic harm (reduced consumer surplus) if the firm does diversify.