Since Margaret Thatcher began selling off state-owned utilities in 1984, the United Kingdom has become something of a role model for privatization. Govern-ments around the world have embraced not only the priva-tization ideology but also its methods. The RPI-X formula, which is used to set the prices that UK privatized utilities charge their customers, has driven gains in efficiency so successfully that it is becoming the method of choice in countries from Argentina to Australia.

But RPI-X is imperfect, and over the past few years flaws have begun to emerge. It is appropriate for driving effi-ciency improvements in the early years after privatization, but something different will be needed in the longer term. One possible replacement is a system based on rolling historical benchmarks.

Why regulate?

The productivity of a country’s utilities plays a vital part in the productivity of the overall economy for two reasons. First, the price other companies pay for their share of these essential services affects their own performance. Second, utilities in themselves generally make up some 10 percent of a nation’s GDP.

It is the importance of the utilities to the national well-being that explains why, at least until the 1980s, most governments chose...