What is a 'Price-Cap Regulation'

A price-cap regulation is a form of economic regulation generally specific to the utility industry in the United Kingdom. Price-cap regulations set a cap on the price that the utility provider can charge. The cap is set according to several economic factors, such as the price cap index, expected efficiency savings and inflation.

BREAKING DOWN 'Price-Cap Regulation'

After the rising costs of inputs (inflation) and the prices charged by competitors are considered, the price-cap regulation is introduced to protect the consumers while ensuring that the business can remain profitable.

Price-cap regulations stand in contrast to rate-of-return regulations and revenue-cap regulations, other forms of price and profit controls used in the United Kingdom. All private British utility networks are now required to adhere to price cap regulation.

How Price Cap Regulation Can Affect Industry Activity

Although price cap regulations are heavily identified with British utilities, such policies have been instituted elsewhere including the United States. For instance, telephone service providers in the U.S. were put under price-cap regulation for a time, though this was largely replaced by rate of return regulation.

The presence of a price-cap regulation can compel utility companies to find ways to reduce their costs in order to improve their profit margins. A favorable case might be made for the efficiencies that are encouraged by the regulations. The upper limits on pricing for the industry mean that companies have to focus on running their operations with the least amount of disruption at the lowest possible price to turn the greatest profit.

A price cap might have the side effect of deterring capital expenditures among utility companies such as investment in infrastructure. Companies under price-cap regulations might also reduce services as well as they strive to control costs. This creates a risk of erosion of quality and service from utility companies.

A deterrent to reducing service too much for the sake of cutting costs is that such action can create incentives for new entrants to appear in the market. There may also be minimum requirements enforced by regulators to prevent companies from eliminating essential services. For example, a price floor might be established as a way to discourage companies from lowering their rates to anti-competitive levels that severely undercut rivals.

There can be additional costs for companies as they aim to maintain compliance with price-cap regulation policies. This can include putting time and management resources toward ensuring that the rates and prices applied by the company fall within the designated range.

  1. Revenue Cap Regulation

    Revenue cap regulation seeks to limit the amount of total revenue ...
  2. Capped Fund

    A capped fund is a fund with specified maximum limitations included ...
  3. Large Cap - Big Cap

    Large cap refers to a company with a market capitalization value ...
  4. Locally-Capped Contract

    A locally-capped contract is a structured investment product ...
  5. Capped Option

    A capped option limits, or caps, the maximum profit for the holder ...
  6. Regulated Market

    A regulated market is a market over which government bodies or, ...
Related Articles
  1. Investing

    What Are Market Cap Mutual Funds?

    Mutual funds that target specific market capitalization levels offer unique benefits to investors and market timers. Learn which which mutual fund market cap suits you.
  2. Investing

    An Introduction To Small Cap Stocks

    Get an introduction to small cap stocks, and learn why when it comes to a company's size, bigger isn't always better for investors.
  3. Investing

    Market Cap

    Learn more about how market cap represents the "price tag" of a company.
  4. Investing

    Small-cap, mid-cap, and large-cap stocks: A 2016 comparison

    Find out what to happened with small-cap, mid-cap, and large-cap stocks in 2016 – and learn why it is important to diversify between all three.
  5. Small Business

    Capitalization Rate

    Capitalization Rate is a financial term most commonly used in the real estate investment industry. It is often simply called the Cap Rate.
  6. Trading

    Small Caps Are Just Too Risky At These Levels

    With the rise in the markets over the past few weeks many traders are starting to wonder if now is the time to buy small caps. These 3 charts suggest that it may be best to wait.
  7. Investing

    Which ETF To Choose: Small Cap Vs. Large Cap

    To get ahead, investors need to focus on rebalancing and diversification, rather than one asset class.
  8. Investing

    Why Trump's Small Cap Rally Is Flaming Out

    Small caps badly lag the market on concerns about delays in Trump's economic plans
  9. Trading

    Get To Know These Crucial US Options Market Regulations

    How are options regulated in the U.S and which organizations are involved in options market regulations?
  10. Insights

    Fintech in the Trump Era: Regulatory Changes to Expect

    Will Trump’s administration try to repeal Dodd-Frank, or simply change financial regulations?
  1. How can I use market capitalization to evaluate a stock?

    Find out how market capitalization affects valuation in fundamental analysis, which valuation ratios use market cap and how ... Read Answer >>
  2. How is a company's stock price and market cap determined?

    A company's market cap is represented by its outstanding number of shares multiplied by its stock price, which is initially ... Read Answer >>
  3. What kind of investors buy utility stocks?

    Take a look at why income investors like utilities, why value investors might like utilities and why growth investors tend ... Read Answer >>
Hot Definitions
  1. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  2. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  3. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  4. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  5. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  6. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
Trading Center