Price Cap Model

The Price Cap Model is a regulatory approach used to control how much utility companies, like electricity or water providers, can charge customers. Instead of setting specific rates for each service, regulators set a maximum price increase (the cap) based on expected efficiency improvements and inflation. The company can keep earnings as long as it stays within the cap, encouraging cost management and innovation. Periodically, the regulator reviews and adjusts the cap to ensure fair prices and service quality, balancing consumer protection with the company's incentive to operate efficiently.