Investment under RPI-X: Practical experience with an incentive compatible approach in the GB electricity distribution sector

Regulatory price controls on the British (GB) electricity distribution sector have been a marked success. Charges to customers have been reduced, network reliability has improved and companies have made above average returns along the way. Nonetheless, each review brings new challenges. This article describes one of the main innovations introduced at the fourth electricity distribution price review (DPCR4) – an incentive compatible approach to setting capex allowances. We set out the rationale for its adoption, the practicalities in applying the mechanism and its position in the broader context of regulatory developments in the sector.