COMPARISON OF HISTORICAL COST AND GENERAL PRICE LEVEL ADJUSTED COST RATE BASE REGULATION.

The purpose of the present paper has been indicated. We will begin with a brief description of historical cost regulation without inflation. We then examine the consequences of inflation at a rate that is known with certainty for an unregulated company, for a bond, for a public utility under historical cost rate base regulation, and for a public utility under price level adjusted cost rate base regulation. Comparative analysis of the two modes of regulation reveals that investors should be indifferent between them if the regulatory process and capital markets are free of imperfections. However, under the reasonable assumption that there are no markets in what is called human capital, the consumer is better off under price level adjusted rate base regulation than under historical cost regulation. [ABSTRACT FROM AUTHOR]