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Utility regulation – Changes afoot

08 Aug 2022 / Corporate research

Patching up a tainted model

While the gas supply crisis – and its price implications – have dominated the UK price regulated sectors in recent months, other issues have arisen that have seriously tainted the price regulation system itself. Indeed, it is fair to ask whether it is ‘’fit for purpose’’.

Back in 1984, price regulation, via an unsophisticated RPI-x formula, was introduced to prevent the privatised British Telecom (BT) from abusing its market power. A similar price regulatory formula applied to British Gas, which was privatised in 1986. In the latter’s case, a full “cost pass through” (CPT) mechanism was permitted so that end users directly bore the cost of higher gas input prices.

More than 35 years later, we have turned full circle, with a new energy price cap being set at £1,971 for households on a default tariff – some 22m consumers. By October 2022, that figure is expected to exceed a shocking £3,200. Admittedly, for a regulatory regime to absorb such a massive turnaround in input costs, is unprecedented; in time, the cap should fall back.

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