UK: Development of Price Cap (RPI-X) Regulation, 1989-2005

The Situation

The England and Wales water authorities were privatized in 1989, retaining their vertically integrated structure and regional monopoly status. The newly privatized companies were accountable to customers through independent drinking water quality, environmental, and economic regulators. The broad framework adopted for economic regulation was the price cap ("RPI-X") formula, which provided companies with the incentive to minimize costs by allowing them to earn profits from outperforming regulatory expenditure expectations.

NERA's Role

Over the sixteen years since privatization NERA has advised on a very large number of aspects of the development of the regulatory arrangements: procedures, methodologies, and monitoring requirements between reviews, procedures, and methodologies to be applied at reviews, appeals possibilities, wider License provisions, and statutory provisions including License termination.

The Result

The regulatory framework in the UK water industry is widely considered to be one of the most advanced and effective in the world of utility regulation. NERA has been, and continues to be, highly influential in the development of regulatory methodology, through the timely production of key reports, and presentations. For example, NERA has produced a number of reports on the incentive structures implicit within the current regulatory framework, eg. "RPI-X and Benefit Sharing" and "Incentives and Commitment in RPI-X Regulation"; NERA has also hosted two industry workshops on access arrangements in the UK water industry and continues to be influential in the developing framework for competition and access regulation in the industry.