Criticisms of the RPI-X form of regulation
42. Criticisms of RPI-X
regulation have centred around the implementation and operation
of the formula, the main ones being:
-- the
RPI-X caps "have not been tough enough";[72]
that the high levels of profits and returns achieved by the companies
have not been consistent with a fair distribution of benefits
between the shareholders and customers;[73]
-- the
disadvantage that the regulator faces in obtaining accurate information
about the company's efficient level of forward-looking costs gives
the company scope to obscure the picture leading to a built-in
tendency to set price caps which are too lax;[74]
-- any
mistakes made in the setting of prices carry a risk of being magnified
by the length of time for which the price control is set. [75]
43. Both the energy regulators
argue that the high levels of profits were confined to the initial
controls set by the Government on privatisation.[76]
The Eastern Group claimed that the Government set the price caps
at a level which would make the flotations attractive to investors,
that the price caps tended to understate the possible efficiency
gains and that the caps were not set on the basis of detailed
comparative and evaluative exercises fundamental to subsequent
periodic reviews.[77]
Both energy regulators believe the net result was that the initial
price controls unduly favoured shareholders over customers.[78]
We agree, though we find it hard to see how it would have been
possible prior to flotation to have accurately estimated likely
efficiency gains.
44. In subsequent price
reviews the energy regulators have set progressively more stringent
price controls, partly because they have become more experienced
at operating RPI-X controls, and partly because they have accumulated
historic data to help them. [79]
At the same time it is becoming increasingly challenging for companies
to make continuing efficiency savings and, according to National
Power, it will become increasingly difficult for companies to
beat X.[80]
The evidence suggests that the second and subsequent reviews
appear to have passed on a proportion of the out-performance of
the first period thus redressing to some extent the balance between
shareholders and consumers.[81]
45. However, the GCC is
"convinced that the consumer still pays too much for gas"
partly because the Council believes that TransCo's costs are
inflated.[82]
United Gas suggested that some 50% of TransCo's costs are charged
in from other parts of the organisation.[83]
OFGAS admitted that it was "very suspicious that those [TransCo's]
figures are inflated".[84]
We received no evidence of equivalent concern about NGC. However,
the issue here is not the use of the RPI-X formula in principle,
but of the valuation of assets and getting the X factor right.
The DGES is of the view, that "to the extent that there
has been public concern, it seems to have focused on a sub-set
of controls of a sub-set of companies in one particular industry,
namely the initial and subsequent distribution price controls
of the regional electricity companies in England and Wales".
This suggests that any problems with price controls are likely
to be "associated with the specific circumstances and treatment
of those particular businesses, both at flotation and subsequently,
rather than being a generic problem associated with RPI-X price
controls for regulated monopolies".[85]
46. With regard to claims
that TransCo's cost are inflated, the DGGS told us that "we
have never got to the bottom of the charges that British Gas Corporate
Centre charges to TransCo or to the public gas supply business".[86]
This matter has now been referred to the MMC. This raises a
fundamental issue about the amount of information on the regulated
business to which the regulator should have access. If the regulator
had access to all information available to a regulated company
when setting the X factor, the likelihood of forecast performance
being exceeded by dint of lower-than-agreed capital and/or operating
expenditure could be avoided. While performance better than foreseen
by the regulator may be redressed in the following price control
round, we do not find it satisfactory that calculating the value
of X is, in part, a function of incomplete information. Short-term
gain for shareholders through obfuscation is not acceptable and
regulators should consider what additional powers are necessary
to obtain complete and timely information from regulated companies.
72 Mem. p.68. Back
73 Ev.
p.209. Back
74 Ev.
p.210, 247. Back
75 Ev.
p.247. Back
76 Ev.
p.247; "Utilities Regulation Consultation for Change",
Professor Littlechild, Industry Forum Conference, 1995, p.7. Back
77 Ev.
p.210. Back
78 Ev.
p.247; "Utilities Regulation Consultation for Change",
Professor Littlechild, Industry Forum Conference, 1995, p.7. Back
79 Mem.
p.34. Back
80 Mem.
p.34. Back
81 Ev.
p.210; "Utilities Regulation Consultation for Change",
Professor Littlechild, Industry Forum Conference 1995 pp.6-8. Back
82 Q.428. Back
83 Q.103. Back
84 Q.901. Back
85 "Utilities
Regulation Consultation Change",
Professor Littlechild, Industry Forum Conference, 1995, p.7. Back
86 Q.901. Back
