Regulators often focus on issues of price, incentives, and market structure.1 However, issues of service quality, achieving social objectives, and the environment – sometimes collectively called non-price issues – also receive considerable attention. As in the case of tariff design, there are instances in service quality, social, and environmental issues in which the interests of the operator and the interests of the government may coincide. An example is the case of prepaid cards for mobile service in telecommunications described in Tariff Design. Telecommunications operators developed these cards without government direction and many among the poor are now able to have phone service as a result of these cards.
Situations, however, where the interests of the government differ from the interests of the operator.2 For example, if the customers at the margin – i.e., the customers who are most indifferent about whether or not to purchase the service – are not very responsive relative to other customers to changes in service quality, then the operator has an incentive to under invest in quality. Furthermore, it may be difficult for customers to ascertain quality before making their consumption decision or to adjust their purchasing if quality is poor. In these situations the pricing mechanism does not provide the operator with an incentive to invest in the appropriate amount of quality.
Also, if the environmental impact of the utility service is an externality, then a profit-maximizing operator would under invest in environmental protection. An externality is an effect that is visited on someone who is not a party to the transaction. For example, if producing electricity causes air pollution, people who are not purchasing the electricity may suffer from the air pollution. Absent government intervention or some other extra-market effort, this pollution effect does not affect the operator’s profits, so the operator does not make production decisions that are beneficial from a welfare perspective.
When the interests of the operator and the interests of the government do not coincide, the government may find it optimal to establish incentives for the operator to pursue the government’s goals with respect to service quality, social issues, and the environment. These issues are considered in this section, as are service quality issues, environmental issues, and finally social issues. Following this section’s narrative is a list of references, organized by topic.