A theoretical weakness of price cap regulation is that it could lead to a deterioration of service quality. Some price cap plans therefore include a service quality component to ensure that service quality will not suffer under price cap regulation.
Regulators can set a service quality component by:
- Selecting a key service quality measures, and
- Monitoring the regulated firm’s performance against these measures.
If performance falls below the required standards the firm is penalized, for example through an increase in the X-factor. Conversely, the firm should be rewarded for exceeding service standards.
RELATED INFORMATION
Price Cap Baskets
Assessing Price Variations
Calculating the Productivity Factor
Exogenous Cost Factors