Price-cap regulation

Price-cap regulation is a form of regulation designed in the 1980s by UK Treasury economist Stephen Littlechild, which has been applied to all of the privatized British network utilities. It is contrasted with rate-of-return regulation, in which utilities are permitted a set rate of return on capital, and with revenue-cap regulation where total revenue is the regulated v ""CPI - X", (in the United Kingdom "RPI-X") after the basic formula employed to set price caps. This takes the rate of inflation, measured by the Consumer Price Index (UK Retail Price Index, RPI) and subtracts expected efficiency savings X. In the water industry, the formula is "RPI - X + K", where K is based on capital investment requirements. The system is intended to provide incentives for efficiency savings, as any savings above the predicted rate X can be passed on to shareholders, at least until the price caps are next reviewed (usually every five years). A key part of the system is that the rate X is based not only a firm's past performance, but on the performance of other firms in the industry: X is intended to be a proxy for a competitive market, in industries which are natural monopolies.

In most industries in the UK, estimation of a firm's efficiency is carried out by comparing regional monopolies and using a total factor productivity method. However, for telecommunications, Ofcom instead relies on international comparisons.

In practice, the distinction between price-cap and rate-of-return regulation may be lost, as regulators may end up making implicit decisions on the acceptable real rates of return on capital employed in order to arrive at price limit determinations. This has been the experience in the UK water sector, where the 1999 periodic review led Ofwat to determine a standard (real post-tax) cost of capital of 4.75%, with minor adjustments for smaller companies. This standard rate was then used to help calculate X.

Price-cap regulation is no longer a uniquely British form of regulation. Particularly in the telecommunications industry, many Asian countries are implementing some form of price cap on their newly-privatised operators. In addition, many US Local Exchange Carriers are now regulated by price-cap rather than rate-of-return regulation: in 2003, of the 73 companies reporting to the ARMIS database, 22 were regulated according to an RPI-X price cap (and a further 35 were subject to other retail price controls).

ee also

* Ofwat, Ofgem, Ofcom
* market failure

External links

* [http://www.regulationbodyofknowledge.org/04/narrative/4/ Features of Price Cap and Revenue Cap Regulation] from the [http://www.regulationbodyofknowledge.org Body of Knowledge on Utility Regulation]
* Ian Alexander and Timothy Irwin (1996), "Price Caps, Rate-of-Return Regulation, and the Cost of Capital" [http://rru.worldbank.org/Documents/PublicPolicyJournal/087irwin.pdf]


Wikimedia Foundation. 2010.

Look at other dictionaries:

  • Price Cap Regulation — A form of economic regulation generally specific to the utility industry in the United Kingdom. Price cap regulation sets a cap on the price that the utility provider can charge. The cap is set according to several economic factors, such as the… …   Investment dictionary

  • Price-Cap-Regulierung — Die Höchstpreisregulierung (englisch price cap regulation) ist eine Methode zur Regulierung von natürlichen Monopolen, die im Gegensatz zu einigen anderen theoretisch besseren Methoden als praxistauglich gilt. Natürliche Monopole entstehen in… …   Deutsch Wikipedia

  • Revenue-cap regulation — regulation is a system for setting the prices charged by regulated monopolies. It is contrasted with rate of return regulation, in which utilities are permitted a set rate of return on capital, and with price cap regulation where total revenue is …   Wikipedia

  • Revenue Cap Regulation — A form of economic regulation generally applied to utility companies. Revenue cap regulation seeks to limit the amount of total revenue received by a company operating which holds monopoly status in the industry. Like price cap regulation,… …   Investment dictionary

  • Cap and Share — is the name of both an approach and a campaign to halt climate change. It is based on the belief that every human being has a right to an equal share of the Earth s very limited capacity to accept further greenhouse gas emissions before the… …   Wikipedia

  • Regulation D — / dē/ n: a regulation of the Securities and Exchange Commission governing the limited offer and sale (as by a private offering) of unregistered securities Merriam Webster’s Dictionary of Law. Merriam Webster. 1996. Regulation D …   Law dictionary

  • Rate-of-return regulation — is a system for setting the prices charged by regulated monopolies. The central idea is that monopoly firms should be required to charge the price that would prevail in a competitive market, which is equal to efficient costs of production plus a… …   Wikipedia

  • Mercury regulation in the United States — is a set of laws and regulations limiting the maximum concentrations of mercury (Hg) that is permitted in air, water, soil, food and drugs. These laws and regulations are promulgated by U.S. Federal Agencies such as the Environmental Protection… …   Wikipedia

  • Incentive — For the video game developer and publisher, see Incentive Software. For the independent record label, see Incentive Records. In economics and sociology, an incentive is any factor (financial or non financial) that enables or motivates a… …   Wikipedia

  • Regulatory economics — is the economics of regulation, in the sense of the application of law by government that is used for various purposes, such as centrally planning an economy, remedying market failure, enriching well connected firms, or benefiting politicians… …   Wikipedia


Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”

We are using cookies for the best presentation of our site. Continuing to use this site, you agree with this.