• Safeguards consumers & competitors.
• Provides incentives for increased efficiency and innovation.
• Provides increased pricing flexibility.
• Simple and straightforward to implement.
• Reduces regulatory burden.
• Facilitates transition to deregulation.

Consumer Protection

• Price cap limit overall level of prices charged by monopoly firm.
• X factor ensures consumers benefit from reductions in real prices each year of plan.
• Focus on prices, rather than cost, ensures benefits of price caps are targeted at consumers.

• An additional offset to the inflation index
• Increases target X factor.
• Provides consumers with additional benefits in the form of price reductions.
• Encourages telco to improve overall efficiency.
• Recognizes expected additional productivity under price caps.
• Ensures consumers benefit from real price reductions over and above historical avg.

• An additional pricing constraint designed to limit cross-subsidization between services.
• Groups related services and products into distinct categories.
• Each basket subject to price cap separately Revenue losses from price cuts in one basket cannot be offset through price increases in another basket.

• Bands place limits on relative price movement of individual services.
• Wide bands allow firm flexibility to rearrange prices within the basket.
• Narrow bands limit pricing flexibility; constrain increase/decrease in individual service prices.

• Price caps should protect competitors from

  * excessive price increases for essential or bottleneck services (e.g., Interconnection)

  * predatory prices for more competitive services (e.g., Long distance)

• Separate baskets/pricing constraints for competitor services.
• Price floor and imputation test requirement for competitive services.

• Price caps breaks the link between prices and earnings performance.

  * dose not place ceiling on level of profits during plan

• Firms gains opportunity to earn higher profits by:

  * minimizingcosts and operating more efficiently

  * developing new services; stimulating deman

• Price caps generally allows for automatic approval of price changes.
• Suited to increasingly competitive market.
• Rebalancing and restructuring may be accomplished within price cap.

• Focuses on two key variables: Inflation and Productivity.
• Once these variables are established, price cap eyetem effectively “runs on its own”
• Easy to administer; easy to understand.
• Facilitates regulatory certainty.

• Under price caps, prices not earnings are regulated.
• Decreased need for information

  * no need for detailed scrutiny of investment, expenses and earnings.

• As long as prices conform to price cap constraints, no other supporting material required.

• By limiting incentive and opportunity for anti-competitive behavior, price caps can stimulate development of competition.
• Services may be removed from the price cap basket as competition develops.
• Structure and parameters of price caps may be reviewed and revised at end of term of plan.

Price caps Issues of Regulatory and Policy Concern

• Under price caps, earnings are no longer guaranteed or regulated during the term of the plan.
• Raises concern about achieved earnings during price caps

  * excessive returns could signal inappropriate productivity factor.

  * too low returns could impact financial viability of firm.

• Under price caps, firms may have incentive to maximize profits by compromising quality of service or curtailing investment.
• Most price cap plans include requirement for periodic quality of service reports and/or fines for quality degradation.
• FCC has concluded that quality of service has not deteriorated under price caps.

• Errors in the selection of the X factor or other parameters of the price cap formula will accumulate over time.

  * increase deviations of price from cost.

• All price cap plans must anticipate possibility or systematic error

  * review period

• However, any revisions to price cap parameters will blunt efficiency incentives