Regulation of Privatised Industries
- Privatisation does not remove the need for regulation
- Regulators have to act as surrogate competition
- In the UK, regulation has been through price-capping
- Certain privatised industries that are still regulated are not permitted to raise prices beyond RPI-X (now CPI - X)
- I.e. real prices must fall.
e.g. BT RPI –4.5% in 2000
Gas RP I- 6.5% in 2000
Railways RPI –2.0% in 2000 - The price capping is discretionary and depends upon the regulators assessment.
- The RPI –x formula provides an incentive for cutting costs because if you can reduce costs more than x then you can make larger profits.
However regulators frequently underestimated potential for cost savings and so privatised companies have often made large profits. E.G. REC saw their profits soar by 4 times stock market In first four years of privatisation.
Definition of Regulatory capture
Regulatory capture occurs when the regulating body comes to identify with the interests of the firm it regulates and eventually becoming its champion rather than its watchdog.
Other forms of Regulation
1. Yardstick competition (or rate of return). This is used in US where “excessive” profits are taxed. This system provides little incentive for efficiency. However UK regulators can look at the relative profits of privatised companies to see whether prices should rise
Other functions of regulators includes
1. Checking quality of service e.g running unprofitable off peak servise
2. Encouraging competition and ensuring that new entrants have access to the market. Therefore regulators aim to make themselves redundant by replacing themselves with competitors.
Revision Notes and Essays on Privatisation
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