Has Price Cap Regulation of U.K. Utilities Been a Success?
Price controls -- typically reviewed every five years in the United Kingdom -- have been controversial. The author traces the development of U.K. price controls and explains that the initial controls for electricity and water companies, based on underestimates of the companies' scope for reducing costs, turned out to be overly generous, allowing them high profits. While some analysts have suggested annual profit-sharing regulation, the practical problem is that annual profit-sharing would place a heavy information burden on firms and regulators and would weaken companies' incentives to lower costs. Although the utilities are still unpopular in the United Kingdom, most experts would be willing to defend the periodic price control system as one that gives companies an incentive to cut costs and return the gains to consumers after a short time. The high profits of the early 1990s were due largely to unanticipated, one-time productivity gains following privatization that are unlikely to be repeated. The established method for resetting price controls makes further "mistakes" unlikely.
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| Language: | English |
| Published: |
World Bank, Washington, DC
1997-11
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| Subjects: | CONSUMERS, CONTROLLED PRICES, COST OF CAPITAL, DIVIDENDS, ECONOMIC DEVELOPMENT, MERGERS, MONOPOLIES, PRICE CAP REGULATION, PRICE CONTROL, PRICE CONTROLS, PRICE INDEX, PRODUCTIVITY, REGULATORY APPROACHES, REGULATORY CAPTURE, RETAIL, SALES, TAKEOVER, TELECOMMUNICATIONS, TOTAL REVENUE, UNDERESTIMATES REGULATIONS, DENATIONALIZATION, ELECTRICITY, PUBLIC ENTERPRISES, RATE OF RETURN, CONSUMER PRICES, WATER SUPPLY, MARKET COMPETITION, PUBLIC SERVICES, |
| Online Access: | http://documents.worldbank.org/curated/en/1997/11/441716/price-cap-regulation-uk-utilities-success https://hdl.handle.net/10986/11565 |
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| Summary: | Price controls -- typically reviewed
every five years in the United Kingdom -- have been
controversial. The author traces the development of U.K.
price controls and explains that the initial controls for
electricity and water companies, based on underestimates of
the companies' scope for reducing costs, turned out to
be overly generous, allowing them high profits. While some
analysts have suggested annual profit-sharing regulation,
the practical problem is that annual profit-sharing would
place a heavy information burden on firms and regulators and
would weaken companies' incentives to lower costs.
Although the utilities are still unpopular in the United
Kingdom, most experts would be willing to defend the
periodic price control system as one that gives companies an
incentive to cut costs and return the gains to consumers
after a short time. The high profits of the early 1990s were
due largely to unanticipated, one-time productivity gains
following privatization that are unlikely to be repeated.
The established method for resetting price controls makes
further "mistakes" unlikely. |
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