Incentive Regulation and Efficient Pricing

Abstract

Abstract**: One objective of introducing incentive regulation to the newly privatized UK utilities over the past 20 years was to encourage efficient pricing structures. Caps have been imposed on average price levels, giving firms freedom to rebalance amongst prices within the basket. We test how firms have responded to the incentives within such discretion through an extensive review of the relative prices charged within UK price capped industries. We find surprisingly little response to these incentives, suggesting that strategic behaviour dominates short‐term profit incentives even after the introduction or threat of competition.

Nonlinear Pricing and Tariff Differentiation: Evidence from the British Electricity Market

“…This implies that British Gas was, in fact, cheaper for all consumers who consumed more than 1945kWh per year units of electricity. Using Figure 1, this appears to include roughly 80% of all consumers 16 . Figures 6(i) and 6(ii) con…rm that these di¤erences in tari¤ structure remained throughout the time period.…”

Price cap regulation and the ratchet effect: a generalized index approach

“…Joskow (2006)-on the basis of evidence reported by Ofgem, the UK energy regulator-suggests that regulated firms seem to realize most of the efficiency gains in the early part of the regulatory period while, as the price review approaches, the cost cutting activity seems to fall. Giulietti and Waddams Price (2005) analyze the rebalancing of price structures (e.g., fixed vs. variable component, large vs. small users) after privatization for a sample of UK utilities and find evidence which is not consistent with a profit maximization strategy: they argue that this behavior might be consistent with regulatory gaming around the time of the price review, as utilities would take strategically into consideration the impact of a given period performance on price levels in the following regulatory periods. Finally, Dyck and Di Tella (2002) report regression results for the Chilean electricity distribution industry which are consistent with regulatory gaming: using quarterly data over the period 1989-1999, they regress costs on a time trend, company fixed effects and a variable which captures how early in the regulatory period a given observation is, and they found that costs tend to decline mainly in the early phase of each regulatory period and to increase in the last year.…”

Indirect Taxation, Public Pricing and Price Cap Regulation: A Synthesis

“…There have been a number of papers (see, for instance, Hancock and Waddams Price, 1995, Waddams Price and Hancock, 1998, and Giulietti and Waddams Price, 2005 that have questioned the desirability of the so-called process of tariff re-balancing undertaken by many price capped utilities. This process has entailed a sharp rise in the price of items with low price elasticity and a decrease in the price of items whose demand is more sensitive to price changes with a largely documented regressive effect.…”