Abstract
The cap mechanism implies that the regulated service provider can keep any cost savings achieved within the regulatory period for which the price or revenue path has been fixed. By forcing real price reductions through the productivity improvement parameter (the ‘X-factor’) in each period, consumers participate continuously in the anticipated productivity improvements. An important tool in the determination of X-factors is the use of benchmarking techniques such as Data Envelopment Analysis (DEA). This paper discusses the role and practical implementation of regulatory caps as well as the application of DEA techniques in the establishment of regulatory caps for electricity networks. The place of DEA within the process of setting caps is highlighted and an overview is given of how results from DEA feed into the actual setting of the X-factors in the Netherlands.
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