Revenue Cap Regulation is a type of incentive regulation that limits the amount of revenue an organization or company can generate in an industry with few or no competitors. This type of regulation is most often used in businesses that are regulated by the government and have been granted monopolies, such as in the utility sector.

The purpose of revenue cap regulation is to protect consumers by ensuring businesses don't use their monopoly power to get unfair profits, and it can be used to set a baseline for rates and prices, encouraging the business to strive for more efficient operations. As part of the regulation, companies are allowed to earn a certain amount of revenue, known as a revenue cap. If a company exceeds this cap, it would face penalties or need to refund customers to make up the difference.

Revenue cap regulation is different from rate of return regulation. Unlike rate of return regulation, which sets a specific rate of return, revenue cap regulation is based on the overall financial performance of the firm, including its profits, net income, and cash flow. This form of regulation is designed to better reflect the competitive pressures of the market, and the costs and risks associated with its operations.

The main benefits of revenue cap regulation include an improved level of competition and a more transparent pricing system. This type of regulation also helps to ensure goods and services are available at a fair price, as prices are determined to cover a firm's costs while still providing a profit to return to shareholders.

Ultimately, revenue cap regulation is an important regulatory tool used in the utility sector. It helps to ensure consumers pay fair prices for goods and services and that monopolistic producers are held accountable for their decisions. By limiting the amount of revenue a firm can reap, it encourages competition and cost efficiency, helping to make these industries healthier.