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

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.