Abstract  Since the emergence of a spot market in natural gas in 1984, state regulators have been concerned that regulated utilities would fail to choose between contracts and spot purchases in a way that minimizes costs. Grounds for this concern are shown, under two alternative rate structures, in a model where regulation produces ex post profit and loss restrictions. Two policy resolutions to the problem are suggested, one that uses an alternative mechanism for triggering rate reviews, allowing the substitution of ex ante for ex post profit and loss restrictions, and one that exploits the special structure of gas markets within the context of traditional regulatory practice.

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