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Yardstick and incentive issues in UK electricity distribution price controls
Author(s) -
WeymanJones Thomas
Publication year - 2001
Publication title -
fiscal studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.63
H-Index - 40
eISSN - 1475-5890
pISSN - 0143-5671
DOI - 10.1111/j.1475-5890.2001.tb00041.x
Subject(s) - yardstick , economics , incentive , natural monopoly , distribution (mathematics) , electric power distribution , electricity , industrial organization , asset (computer security) , capital (architecture) , microeconomics , monopoly , power (physics) , mathematical analysis , physics , geometry , mathematics , computer security , archaeology , quantum mechanics , computer science , electrical engineering , history , engineering
Electricity distribution is a primary candidate for regulation since it is a natural monopoly whose costs it would be inefficient to duplicate in a competitive market. In the UK since privatisation of the electricity industry in 1990, this regulation has emphasised incentives for cost efficiency through the use of RPI‐X price capping applied to 14 regional distribution businesses. The paper examines the issues that have arisen in implementation, including the practice of bench‐marking the operating and capital expenditures of different companies. It analyses how the price set at the beginning of each review period depends on the determination of cost yardsticks, the weighted average cost of capital and the regulatory asset base of the companies. The analytical model is used to evaluate Ofgem's 1999 Distribution Price Control Review and compares it with other European distribution price regulations.