.jpg)
This article covers the review that reset Britain’s electricity distribution price controls from 1 April 1995, and the reopening that tightened them from 1 April 1996. It follows the first article in this series, which covered privatisation and the initial 1990 controls, and it is followed by the third article, on the review that reset charges from 2000. It draws from the first-hand account by the regulator who set the controls, Professor Stephen Littlechild, in conjunctions with OFFER’s own later consultation papers.
A note on numbering. This is the review that set distribution charges for 1995 to 2000. While the 1995 review is counted as the first distribution price control review in Ofgem’s histories and in the academic literature, its 1996 reopening is considered the second, and the review that reset charges from 2000 as the third.
This article therefore covers the first and second price control reviews according to the official numbering.
Table 1: How the 1995 review unfolded, October 1993 to April 2000
The 1995 review was the first full reset of the distribution price controls after privatisation, replacing the initial 1990 controls from 1 April 1995. It covered the twelve Regional Electricity Companies in England and Wales and was run by the electricity regulator at the time, the Office of Electricity Regulation (OFFER, later replaced by the current Ofgem), under its Director General, Professor Stephen Littlechild.
The initial controls set by the Government at privatisation ran for five years until 31 March 1995. The review process changed the shape of the control, cut charges in real terms for the first time, and refined the method that later reviews would be based upon. It is the second of the numbered distribution price control reviews.
The 1990 controls needed resetting because they had been set too generously, and the companies had turned out far more profitable than expected. The initial caps allowed distribution charges to rise by inflation plus a company-specific figure, on average about 1.1% a year in real terms, with some companies allowed up to 2.5%.
Costs then fell faster than those caps had assumed, and profits rose sharply. From the first months after flotation, the press and Parliament pressed the regulator to intervene early. In March 1992, a parliamentary committee called on the regulator to review the controls before the planned 1995 date, in view of the high profits the companies were making. The regulator declined to reopen the initial controls early, on the view that tearing up the five-year settlement would undermine the incentive to cut costs and would raise the cost of capital for the whole regime. Instead, he waited for the scheduled review set to 1995.
The switch meant that distribution charges would fall, rather than rise, in real terms. The 1990 formula for nominal charge increases was defined as RPI plus X, with X set individually for each company, between 0 and 2.5 percentage points, which let charges grow at an annual rate above inflation. The 1995 controls changed to RPI minus X, with X initially set at 2%, so charges rose by less than inflation and therefore fell in real terms each year.
Figure 1: From real price rises to real price cuts. Ongoing annual change in distribution charges, in real terms
The price control review went beyond changing the sign of the X factor. It combined the annual real reduction in prices with a one-off cut in the starting price for the period. This meant that some of the price increases observed in the previous five years were cut back, and the lower prices were then allowed to grow at the RPI minus 2% annual rate. For customers, that was the first time the networks had been made to reflect the gains from falling costs in their prices.
The first cuts were large one-off reductions, set in three bands: 11% for three companies, 14% for six companies and 17% for three companies, from 1 April 1995.
Figure 2: The first one-off cuts, from 1 April 1995. One-off reduction in distribution charges, by band of companies
The regulator banded the companies into three groups rather than setting a separate figure for each, partly because the underlying model could not bear the weight of twelve precise numbers, and partly because a company grouped with others was less likely to challenge its own cap. The proposals are estimated to have saved over 2.5 billion pounds to customers between 1995 and 2000. In total revenue reduction, they were tougher than the price control on any other regulated company at the time, and far tougher than the RPI plus X caps they replaced.
Table 2: The one-off cuts of August 1994, by band
The regulator set the control using a building-block method, choosing the value of X so that allowed revenue over the period covered a return on the value of the assets, the depreciation of those assets, and efficient operating costs. This was a change from the first price control, which had determined numbers mainly by testing financial ratios and was more focused on not constraining investments than strictly driving efficiency.
Three inputs did most of the work: Operating costs were assumed to fall by about 3% a year, drawing on benchmarking and comparison across the twelve companies; Capital spending was accepted subject to reductions of up to 25%; and the asset base started from each company’s flotation value, raised by an uprate and added to by investment since flotation. The return on the asset base was calculated as a real pre-tax cost of capital of about 7%.
Table 3: The August 1994 proposals at a glance
The proposals were judged too soft mainly because share prices rose after they were published, which suggested to onlookers that companies had gained at customers’ expense. Earlier in the review a confidential letter with much harsher assumptions had leaked, so the market had been expecting a far tougher control. When the final proposals turned out milder than the leak, shares surged, and the reaction was read as a sign of leniency.
The regulator’s own view was different. On his analysis, the new control was sound looking forward, and the share-price rise reflected the removal of uncertainty and the growing recognition of value from other sources, including the previous period’s profits and the prospect of takeovers, rather than a giveaway in the new control. According to him, cutting future charges to claw back past profits would have been a retrospective step, at odds with the incentive approach.
In December 1994, Trafalgar House bid for Northern Electric, one of the smaller companies and one of the three facing the largest 17% cut in their initial price base. In an effort to resist the bid, Northern promised its shareholders a package worth about 560 million pounds, through special dividends, a bonus share and its share of the proceeds from the sale of National Grid. However, the Shareholders were not convinced and approved the deal.
The bid for Northern Electric mattered because a company’s own defence document put a number on how much value the networks still held, at the worst possible moment for the regulator. For a company that the Government had sold a few years earlier for a few hundred million pounds, a defence on that scale looked, to critics, like proof that the review had left too much with shareholders. The press turned sharply on the regulator, and several newspapers called for his resignation. The bid also signalled that more takeovers would follow, which pushed share prices higher again and kept the issue alive.
The regulator reopened the review because he judged that the agreed control could not survive the loss of confidence around it, and that reopening it once was better than implementing it and having to reset it later. On 7 March 1995 he announced that he would reconsider the control. The first year’s cut, already agreed, would take effect from 1 April 1995, and he would look again at whether to tighten the control further from 1 April 1996.
Figure 3: The view that cut charges twice. Real reduction in distribution charges, by year
Reopening a price control after the final consultation was highly unusual, and it drew heavy criticism from investors. On the day of the statement, the companies’ shares fell by approximately 20% on average, illustrating the increase in perceived risk by the investors. In the revised proposals of July 1995, the regulator added a further one-off cut, averaging about 11.5% from 1 April 1996, on top of the 2% annual reduction.
The asset-base uprate was cut because it was the cleanest way to tighten the control without reopening the cost and efficiency numbers, and because it was consistent with the recent MMC ruling on the Scottish Hydro-Electric’s appeal to its price control. The August 1994 proposals had raised each company’s flotation value by 50% to set the asset base, chiefly to reflect a fall in the cost of capital since flotation. In the reopening, that uprate was cut to 15%.
Figure 4: The uprate on flotation value, cut in the reopening. Percentage added to flotation value to set the asset base
The logic of the original uprate was specific. After flotation, the dividend yield, a rough proxy for the cost of capital, was about 7.3%. By the summer of 1994, it had fallen by approximately a third, to 4.8%. A fall of a third in the cost of capital needs an uprate of about 50% in the asset base to leave the same earnings stream. Cutting the uprate from 50% to 15% reduced the final asset base by around 1 billion pounds, and it was the single change that did most to make the reopened control tougher.
The 1995 review left the method that every later price control in England and Wales has used, and a hard lesson about the politics of regulation. Its building-block approach, with a return on a regulatory asset base plus depreciation and efficient costs, was also used by the MMC in its 1995 report on Scottish Hydro-Electric’s appeal, and it became the standard model for energy, water and other regulated networks.
The review also significantly cut charges. Distribution charges by 1998 (post re-opened review) were about 25% lower in real terms than in 1994/95. Finally, it also showcased how far public and political pressure could push a regulator, a tension that runs through the review that followed it in 2000 and through every price control since.
Great Britain privatised electricity distribution in 1990, not 1989. The twelve Regional Electricity Companies were sold that December at 240 pence per share, with Retail Prices Index plus X price controls already written into their licences.
Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris nisi ut aliquip ex ea commodo consequat. Duis aute irure dolor in reprehenderit in voluptate velit esse cillum dolore eu fugiat nulla pariatur.
Block quote
Ordered list
Unordered list
Bold text
Emphasis
Superscript
Subscript
I was delighted that MCC's work was completed on time, and within budget, helping us deliver important changes and improvements, to the benefit of our stakeholders. MCC's report is published on the CCC website.
I am delighted to recommend MCC Economics. Specifically, I worked closely with PJ, who helped us with our Nuclear and CCUS projects. PJ helped us develop new policies and answer questions from our stakeholders. His support helped us deliver important changes and improvements, to the benefit of our stakeholders.
MCC Economics has helped us better understand the most important issues for our stakeholders, including: charges, shareholder returns, debt payments and inflation impacts.
I am delighted to recommend PJ and his team at MCC Economics. We've been working together on National Policy Statements to help meet net zero targets for 2030 and 2050. We initially appointed MCC Economics to support us on offshore wind consultation analysis and have recently reappointed MCC Economics to undertake a larger consultation analysis role across all sectors, including hydrogen, CCUS and networks. I can confirm that PJ and his team have shown excellent spreadsheet skills, alongside very good project management, planning and analysis skills, helping us deliver important changes, and continuous improvements, to the benefit of our stakeholders.
I am delighted to recommend PJ and his team from MCC Economics. They helped us with our price controls for Heathrow airport and for NATS (En Route) plc (the air traffic services provider). Specifically, the MCC team helped us deliver important changes and improvements to our financial models and supporting policy documents, to the benefit of our stakeholders.
I am delighted to confirm that I worked with PJ on a retail project in 2015. The project helped stakeholders understand electricity costs and charges. Specifically, the project helped us explain to stakeholders, internally and externally, why electricity charges differed across the regions (GB, NI & Ireland). PJ was a key member on the project team, which helped deliver changes and improvements in the understanding of energy retail.
.png)
Evidence-based analysis for transparent, defensible, and effective decision-making.
© All rights reserved – MCC Economics 2026.
.jpg)
.jpg)