ABSTRACT
At its simplest, the price cap is a number of percentage points (X) below the standard rate of inflation as measured in the consumer price index. The principle behind price cap regulation is that by fixing prices, utilities are given the incentive to reduce costs and increase profits; compared with conventional rate of return regulation, there is a reward for efficiency. When CPI-X regulation was introduced on privatisation of British Telecom in 1984, it was considered that this form of regulation provided a stop gap measure until regulation became unnecessary as a result of competitive influences in the market. Some economists believe that price cap regulation is the most effective form of regulation as a transitory step on the path towards total deregulation and full competition.
