Regulated companies need to understand how new policies might affect their business, while regulators need to understand how markets work and why they sometimes fail. Developing new approaches to infrastructure regulation, incentive mechanisms, and wider policy issues all depends on the application of sound economic theory and robust empirical analysis.
Oxera is a leading authority on regulatory issues. We understand how regulation will affect the markets and regulated companies. We’ve been involved in every major price control process since the privatisation of UK utilities and have worked on regulatory matters in Europe and beyond. We help regulators define policies and provide regulated companies with advice during regulatory control reviews, inspiring them to make confident and informed decisions that help them to not just survive, but thrive.
‘‘When it comes to regulatory strategy, we work closely with clients at every stage of the price control process.’’
In this Q&A, Oxera economic experts discuss the success stories and key issues our clients face in regulatory reviews
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The skills Oxera applies to price review and regulatory design

Our approach to price reviews and regulatory design covers many sectors and jurisdictions. Drawing from our experience, we’re able to present compelling evidence underpinned by best practice in economic regulation. With this approach, and having led the regulatory debate for more than three decades, we’re trusted to raise the most important issues and provide the right answers.

Oxera regulatory reviews skills blue docs

Efficiency analysis

We help our clients understand the scope for efficiency improvements during a price control period, taking into account factors that may be specific to the company, sector, or jurisdiction.

Strategic advice 

We work closely with clients at all stages during the regulatory price control process.

Financial modelling and analysis 

We understand the tools, models, frameworks, and language that are used in regulatory settings. We have experience in financial modelling for regulatory engagement, including cost of capital estimation, asset valuation and roll-forward, defining the appropriate capital structure, risk analysis, and the extent to which the regulatory package is financeable.

Regulatory policy and incentive design

We help devise regulatory incentives for efficiency, investment, and service quality.

Oxera Regulatory Reviews
Success stories from the frontline of regulatory reviews

Ofwat

Putting customers first every time

Client: Ofwat
Result: Recommendations were implemented

Client: Ofwat

Result: Recommendations were implemented

Oxera helped Ofwat, the regulator of the water sector in England and Wales, to create a solid incentive framework for its new regulatory approach. Ofwat wanted to review the way it regulated water companies.

In particular, it wanted to improve its focus on customers by developing an approach that would incentivise the delivery of customers’ needs.

After looking at the practical implications and likely effectiveness of different approaches, we recommended a flexible framework. One that would allow companies to both propose their own outcome measures and incentive structures (with rewards and penalties depending on the type of outcome), and be assessed across all their measured outcomes.

Ofwat accepted our recommendations, publishing its resultant methodology in ‘Setting price controls for 2015-20-framework and approach’.

New Zealand Commerce Commission

Setting new standards for regulation

Client: New Zealand Commerce Commission
Result: A stronger analytical framework for setting the allowed rate of return

Client: New Zealand Commerce Commission

Result: A stronger analytical framework for setting the allowed rate of return

When the NZ Commerce Commission determined the allowed rate of return for electricity distribution and transmission businesses, the Major Electricity Users Group appealed. The Commission had included a margin within the rate of return to offset the risk of underinvestment. When the case went to the High Court, the Commission’s approach was rejected and it was required to provide further evidence to justify its actions.

So how should we determine the cost of capital assumption in a regulatory context? Especially where the risk of underinvestment can impose widespread costs on users and society more generally.

We provided an innovative approach, assessing evidence that enabled the regulator to make a more informed judgement about the appropriate margin to offset that risk. Our analysis indicated a range below that previously applied by the Commission, but above that proposed by the Major Electricity Users Group.

When consulting on its response to the High Court challenge, the Commission used our evidence to set a lower margin to offset the risk of underinvestment.