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Yardstick and incentive issues in UK electricity distribution price controls

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  • Thomas Weyman-Jones

Abstract

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.

Suggested Citation

  • Thomas Weyman-Jones, 2001. "Yardstick and incentive issues in UK electricity distribution price controls," Fiscal Studies, Institute for Fiscal Studies, vol. 22(2), pages 233-247, June.
    • Handle: RePEc:ifs:fistud:v:22:y:2001:i:2:p:233-247
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    References listed on IDEAS

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    1. 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.
    2. David M. Newbery & Michael G. Pollitt, 1997. "The Restructuring and Privatisation of Britain's CEGB—Was It Worth It?," Journal of Industrial Economics, Wiley Blackwell, vol. 45(3), pages 269-303, September.
    3. Burns, Philip & Weyman-Jones, Thomas G, 1996. "Cost Functions and Cost Efficiency in Electricity Distribution: A Stochastic Frontier Approach," Bulletin of Economic Research, Wiley Blackwell, vol. 48(1), pages 41-64, January.
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    Cited by:

    1. Fumitoshi Mizutani & Hideo Kozumi & Noriaki Matsushima, 2009. "Does yardstick regulation really work? Empirical evidence from Japan’s rail industry," Journal of Regulatory Economics, Springer, vol. 36(3), pages 308-323, December.
    2. Goto, Mika & Tsutsui, Miki, 2008. "Technical efficiency and impacts of deregulation: An analysis of three functions in U.S. electric power utilities during the period from 1992 through 2000," Energy Economics, Elsevier, vol. 30(1), pages 15-38, January.

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    More about this item

    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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