Price cap regulation
This is a fare regulatory system proposed by Stephen Littlechild and adopted by the U.K. government led by Margaret Thatcher in 1984 for the privatization of British Telecom, Britain's telecommunication corporation. The regulation sets a direct price cap on fees, and the regulatory authorities usually review the price cap formula at three to five year intervals without cost assessment. Each service provider can set its fees freely under the price cap, which is calculated by a mathematical formula. The following is the basic format of the price cap formula.
Mt = Pt-1 + Pt-1 (I-X)
Mt: Price cap in the year t.
Pt-1: Price cap for the year t -1.
I: Consumer price index
X: Rate of efforts to improve productivity
One of the problems with the full-cost principle is lack of incentive to achieve efficiency on the part of service providers because their cost saving efforts are not reflected on their profit. To rectify this drawback, the yardstick system reflects cost information of rival service providers in determining the fares, rather than basing the fares on the cost assessment of the pertinent business. Under this system, there is no incentive for service providers to report high costs. In fact, if they streamline the operation and reduce costs more effectively than their rivals, they will be awarded with an increase in profits. The standard cost system, adopted by Japanese bus and taxi services, is incorporating elements of the yardstick regulation.