Price cap plans in regulation are designed to mimic competition. The authors present the
index logic that underpins this rationale in North American plans and offer two statistical
approaches–indexing and benchmarking–that play a role in determining industry and/or
national productivity trends and economy and/or industry input price trends that are used to
track the unit cost of the industry.

We have shown that the primary focus of a North American price control proceeding is the
calibration of the PCI to track the unit cost trend of the industry. This commonly requires the
calculation of regional or national productivity trends and may also involve an index of
industry input price trends. A standard stretch factor is commonly added to the X factor to
share the benefits of improved performance with customers. Alter-natively, the X factor can
reflect the ongoing productivity performance of the group of companies to which it applies. In …