# Price-cap regulation > Mediated Wiki article. Canonical URL: https://mediated.wiki/source/Price-cap_regulation > Markdown URL: https://mediated.wiki/source/Price-cap_regulation.md > Source: https://en.wikipedia.org/wiki/Price-cap_regulation > Source revision: 1194768875 > License: Creative Commons Attribution-ShareAlike 4.0 International (https://creativecommons.org/licenses/by-sa/4.0/) {{Short description|Form of market regulation}} {{Use British English|date=June 2023}} {{Use dmy dates|date=October 2023}} '''Price-cap regulation''' is a form of incentive [regulation](/source/regulation) capping the prices that firms in a [natural monopoly](/source/natural_monopoly) position may charge their customers. Designed in the 1980s by UK [Treasury](/source/HM_Treasury) economist Stephen Littlechild, it has been applied to all privatised British network utilities. It is contrasted with both [rate-of-return regulation](/source/rate-of-return_regulation), with utilities being permitted a set [rate of return](/source/rate_of_return) on capital, and with [revenue-cap regulation](/source/revenue-cap_regulation), with total revenue being the regulated variable.{{Cite journal |last=Green |first=Richard |date=November 1997 |title=Has Price Cap Regulation of U.K. Utilities Been a Success? |url=https://documents1.worldbank.org/curated/en/569601468779182307/pdf/17232-Replacement-file-132GREEN.pdf |journal=Public Policy for the Private Sector |issue=Note No. 132 |via=The World Bank Group. Finance, Private Sector, and Infrastructure Network}} == Functioning == Price-cap regulation adjusts the operator's prices according to * the price cap index that reflects the overall rate of inflation in the economy, * the ability of the operator to gain efficiencies relative to the average firm in the economy, and * the inflation in the operator's input prices relative to the average firm in the economy. Revenue cap regulation attempts to do the same thing but for revenue, rather than prices.[http://www.regulationbodyofknowledge.org/04/narrative/4/ Body of Knowledge on Infrastructure Regulation] {{webarchive|url=https://web.archive.org/web/20090204174712/http://regulationbodyofknowledge.org/04/narrative/4/|date=2009-02-04}} "Price level regulation: Features of Price Cap and Revenue Cap Regulation" Price-cap regulation is sometimes called "CPI - X", (in the United Kingdom "RPI-X") after the basic formula employed to set price caps. This takes the rate of [inflation](/source/inflation), measured by the [Consumer Price Index](/source/Consumer_Price_Index) (UK [Retail Prices Index](/source/Retail_Prices_Index_(United_Kingdom)), RPI) and subtracts expected efficiency savings X. In the [water industry](/source/water_industry), the formula is RPI-X+K, where K is based on capital investment requirements. The system is intended to provide incentives for efficiency savings, as any savings above the predicted rate X can be passed on to shareholders, at least until the price caps are next reviewed (usually every five years). A key part of the system is that the rate X is based not only a firm's past performance, but on the performance of other firms in the industry: X is intended to be a proxy for a competitive market, in industries which are natural monopolies. == Use == === Energy === Notably, in 2018, the UK Government introduced a form of price cap regulation through a new [cap for gas and electricity](/source/Energy_policy_of_the_United_Kingdom) customers on standard variable tariffs.{{cite press release |url=https://www.gov.uk/government/news/victory-for-consumers-as-cap-on-energy-tariffs-to-become-law |title=Victory for consumers as cap on energy tariffs to become law |publisher=Gov.uk |date=2018-07-19 |accessdate=2020-10-21}} In August 2022, the energy price cap was raised to £3,549 which would have pushed 8.2 million people into fuel poverty in October 2022 until March 2023. However, in the event, as a political decision, the UK Government subsidised the supply of domestic electricity by reducing bills by £400 for each household, spread out over six months, and subsidising each unit of electricity as well.{{cite web |title=Energy price cap explained |url=https://www.ofgem.gov.uk/check-if-energy-price-cap-affects-you |access-date=2023-01-13 |website=[Ofgem](/source/Ofgem)}} === Telecoms === Price-cap regulation is no longer a uniquely British form of regulation. Particularly in the [telecommunications industry](/source/telecommunications_industry), many Asian countries are implementing some form of price cap on their newly privatised operators. In addition, many US [local exchange carrier](/source/local_exchange_carrier)s are regulated by price-cap rather than rate-of-return regulation: in 2003, of the 73 companies reporting to [Federal Communications Commission](/source/Federal_Communications_Commission) ''Automated Reporting Management Information System'' (ARMIS) database, 22 were regulated according to an RPI-X price cap (and a further 35 were subject to other retail price controls). In Australia, the preferred form of price regulation for utilities is the CPI-X regime.[http://archive.treasury.gov.au/documents/194/PDF/round5.pdf Price Regulation of Utilities] {{Webarchive|url=https://web.archive.org/web/20150106031702/http://archive.treasury.gov.au/documents/194/PDF/round5.pdf |date=2015-01-06 }} Australian Treasury, 1999 === Airports === Many airports are local monopolies. To prevent them from abusing their market power, governments around the world regulate how much airports may charge to airlines. This price-cap regulation can follow a dual-till approach, in which the regulator considers aeronautical and non-aeronautical (commercial) revenue separately, or a single-till approach, in which the regulator considers all the airport's revenues when determining acceptable airport charges.{{Cite journal |last=Malavolti |first=Estelle |date=2016-01-01 |title=Single Till or Dual Till at Airports: A Two-sided Market Analysis |url=http://hal-enac.archives-ouvertes.fr/docs/01/02/19/79/PDF/208.pdf |journal=Transportation Research Procedia |series=Transport Research Arena TRA2016 |language=en |volume=14 |pages=3696–3703 |doi=10.1016/j.trpro.2016.05.489 |s2cid=53579769 |issn=2352-1465|doi-access=free }} Under dual-till regulation, airports do not use profits derived from concession businesses to finance airport infrastructure, implying higher charges to airlines. The single-till approach typically leads to lower charges to airlines, which better controls airport market power.{{Cite journal |last1=Czerny |last2=Zhang |date=2015 |title=Single-Till versus Dual-Till Regulation of Airports |url=https://papers.tinbergen.nl/15049.pdf |journal=Tinbergen Institute Discussion Paper |volume=TI 2015-049/VIII}} ==See also== * United Kingdom ** [Civil Aviation Authority (United Kingdom)](/source/Civil_Aviation_Authority_(United_Kingdom)) ** [Ofcom](/source/Ofcom) ** [Ofgem](/source/Ofgem) ** [Office of Rail and Road](/source/Office_of_Rail_and_Road) ** [Ofwat](/source/Ofwat) * [Economic regulation](/source/Economic_regulation) * [Regulatory agency](/source/Regulatory_agency) ==References== {{reflist}} ==External links== * [http://regulationbodyofknowledge.org/price-level-regulation/features-of-price-cap-and-revenue-cap-regulation/ Features of Price Cap and Revenue Cap Regulation] from the [http://www.regulationbodyofknowledge.org Body of Knowledge on Infrastructure Regulation] * [http://galbithink.org/telcos/price-cap-review-dataset.htm Data concerning U.S. interstate telephone service price caps] * Ian Alexander and Timothy Irwin (1996), "Price Caps, Rate-of-Return Regulation, and the Cost of Capital" [https://web.archive.org/web/20041001024840/http://rru.worldbank.org/Documents/PublicPolicyJournal/087irwin.pdf] {{Authority control}} Category:Market failure Category:Monopoly (economics) Category:Economics of regulation --- Adapted from the Wikipedia article [Price-cap regulation](https://en.wikipedia.org/wiki/Price-cap_regulation) by Wikipedia contributors ([contributor history](https://en.wikipedia.org/wiki/Price-cap_regulation?action=history)). 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