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Incentive Regulation From the Inside: Resetting 12 RPI-X Price Caps in 1993–1995

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  • Stephen Littlechild

    (University of Birmingham
    Cambridge Judge Business School)

Abstract

After a brief account of my proposed RPI-X incentive regulation for British Telecommunications (BT) in 1983 and for the water industry in 1986, this paper documents my simultaneous resetting in 1993–1995 of the RPI-X price caps for the 12 electricity distribution companies in England and Wales and two in Scotland. I proposed unprecedented price reductions, but the media thought that I should have intervened earlier to tighten the Government’s initial 5-year caps and remove alleged excess profits, and then I should have set even more severe revised price caps than I proposed. In the event, I finally reopened the review and tightened the proposed caps. On reflection, I was trying to implement incentive regulation in the face of an overwhelming media demand for rate-of-return regulation. This account of why my own process achieved such significant price reductions yet was so problematic—and how our regulatory thinking evolved (or failed to) in the light of events and media pressure—may help to explain why incentive regulation has been widely adopted but subsequently much modified, in the UK and elsewhere. It may also provide some insights into how regulation could usefully be developed further to meet the challenges of tomorrow. The paper concludes with some suggested modifications to the regulatory process: particularly to incorporate more negotiation with interested parties in order to get initial agreement, and then to incorporate ongoing appraisal and more rapid adjustment to evolving company and market conditions.

Suggested Citation

  • Stephen Littlechild, 2024. "Incentive Regulation From the Inside: Resetting 12 RPI-X Price Caps in 1993–1995," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 65(2), pages 375-430, September.
    • Handle: RePEc:kap:revind:v:65:y:2024:i:2:d:10.1007_s11151-024-09980-y
    DOI: 10.1007/s11151-024-09980-y
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    References listed on IDEAS

    as
    1. Joseph Doucet & Stephen Littlechild, 2006. "Negotiated Settlements: The development of economic and legal thinking," Working Papers EPRG 0604, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    2. Stephen Littlechild, 2012. "Regulation and Customer Engagement," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 1).
    3. Littlechild, Stephen, 1988. "Economic Regulation of Privatised Water Authorities and Some Further Reflections," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 4(2), pages 40-68, Summer.
    4. David E. M. Sappington & Dennis L. Weisman, 2016. "The disparate adoption of price cap regulation in the U.S. telecommunications and electricity sectors," Journal of Regulatory Economics, Springer, vol. 49(2), pages 250-264, April.
    5. Philip Burns & Ralph Turvey & Thomas G. Weyman‐Jones, 1998. "The Behaviour of the Firm under Alternative Regulatory Constraints," Scottish Journal of Political Economy, Scottish Economic Society, vol. 45(2), pages 133-157, May.
    6. M.E. Beesley & S.C. Littlechild, 1989. "The Regulation of Privatized Monopolies in the United Kingdom," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 454-472, Autumn.
    7. Littlechild, Stephen, 2014. "The Customer Forum: Customer engagement in the Scottish water sector," Utilities Policy, Elsevier, vol. 31(C), pages 206-218.
    8. Robert Hahn & Robert Metcalfe & Florian Rundhammer, 2020. "Promoting customer engagement: A new trend in utility regulation," Regulation & Governance, John Wiley & Sons, vol. 14(1), pages 121-149, January.
    9. A. W. Dnes & J. S. Seaton, 1999. "The regulation of electricity: results from an event study," Applied Economics, Taylor & Francis Journals, vol. 31(5), pages 609-618.
    10. repec:bla:scotjp:v:45:y:1998:i:2:p:133-57 is not listed on IDEAS
    11. Havyatt, David, 2022. "Toward consumer-centric energy network regulation: Australia's experience," Utilities Policy, Elsevier, vol. 78(C).
    12. Helm, Dieter, 2003. "Energy, the State, and the Market: British Energy Policy since 1979," OUP Catalogue, Oxford University Press, number 9780199262038.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Incentive regulation; Price caps; Negotiated settlement;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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