REGULATING PRICES TO EQUAL FORWARD-LOOKING COSTS - COST-BASED PRICES OR PRICE-BASED COSTS

This article defines ''forward-looking cost,'' identifies conditions u nder which forward-looking costs can be calculated, and explains the r elationship among forward-looking costs, depreciation and utilization. It derives a framework to account for the risk of asset death, change s in the cost of new capital, demand growth and uncertainty, and compe tition risk. The potential for competition, asset life uncertainty, an d the installation of excess capacity in anticipation of demand growth raise forward-looking cost. The potential for technological change th at enhances the future value of an asset lowers forward-looking cost.