Principles, Options and Considerations in Rate Design, Including Conditions for Deciding When Tariff Design is a Regulatory Concern

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Core References

Understanding Regulation: Theory, Strategy, and Practice
New York: Oxford University Press, 1999, Chapter 15.
Baldwin, Robert, and Martin Cave

Provides an overview of pricing issues for regulating monopolies. Considers multipart tariffs, Ramsey pricing, and problems of cost recovery.

Basics of Rate Design – Pricing Principles and Self-Selecting Two-Part Tariffs
in Infrastructure Regulation and Market Reform: Principles and Practice, edited by Margaret Arblaster and Mark Jamison. Canberra, Australia: ACCC and PURC, 1998, pp. 74-90.
Berg, S.

Explains that two-part pricing and Ramsey pricing represent innovative ways to recover joint costs. Defines each and explains how Ramsey pricing improves efficiency.

The Economics of Regulation: Principles and Institutions
Cambridge, MA: MIT Press, 1988, Reissue Edition, vol. I, Chapters 2-7.
Kahn, Alfred

Describes pricing issues in utility regulation, giving practical examples and explaining the underlying economics. Considers asset valuation, marginal cost pricing, peak load pricing, short-run and long-run marginal costs, effects of scale economies, externalities, Ramsey pricing, fully distributed costs, and effects of competition.

Sectoral References

ELECTRICITY

Principles of Public Utility Rates
The Columbia University Press, 1961
Bonbright, James C.

Electricity Transmission Pricing: An International Comparison
Utilities Policy 6(3): 1997, pp. 177-184.
Green, R.

Argues that in the case of electricity transmission, prices that closely reflect costs are constrained by the complexity of costs and hurdles to political implementation. Outlines six principles for transmission pricing to be short- and long-term efficient, and politically feasible. These criteria are reviewed using examples from eight studies of transmission pricing systems.

GAS

Issues in Global Natural Gas: A Primer and Analysis
International Monetary Fund Working Paper no. 02/40, 2002.
Okogu, B.

Gives an outlook of the natural gas industry and its evolution in the recent decades. Describes the structure of the industry and points to factors that may constrain its further development. Deals with the contracting process and its implications on the structure of the gas price. Both gas pricing and demand drivers are analyzed using evidence from the literature. Proposes a set of solutions to improve the efficiency of the pricing mechanisms in the natural gas industry.

TELECOMMUNICATIONS

ICT Regulation Toolkit
Washington, D.C.: infoDev and the International Telecommunications Union, 2007, Module 2.

Provides a practical overview of telecommunications pricing issues and regulatory approaches.

The Political Economy of Pricing: Comparing the Efficiency Impacts of Flat Rate vs. Two-Part Tariffs
Communications and Strategies 44: 2001, pp. 55-70.
Mitomo, H.

Following the popularity of flat rates, in particular, in Internet, this paper compares its efficiency to that of another pricing scheme, namely, two-part tariffs. Shows by means of simulations that a change from two-part tariffs to flat rates has negative implications for supplier’s efficiency or profitability. Raises some questions about the economic principles lying behind the choice of flat rates.

TRANSPORTATION

Regulation and Deregulation of the Motor Carrier Industry
Ames, Iowa: Iowa State University Press, 1989.
Felton, John Richard and Dale G. Anderson

Describes the problem of rate inflexibility with regard to space and time in transportation services. Uses the backhaul problem and peak load pricing to illustrate the theory. Presents regulatory experience of the trucking industry in Great Britain and Australia, as well as the United States.

Urban Bus Toolkit: Tools and Options for Reforming Urban Bus Systems
Public-Private Infrastructure Advisory Facility, World Bank.
CPCS Transcom

Provides guide to evaluating existing and alternative urban bus systems in developing and transitional countries. Offers practical advice to enact fundamental system reforms

WATER

The Political Economy of Water Pricing Reforms
Oxford, U.K.: Oxford University Press for the World Bank, 2000.
Dinar, A., ed.

Collects eighteen papers that seek to incorporate political economy concepts in the analysis of reforms in water-pricing schemes. The papers cover such important issues as the impact of market structure and property rights on pricing regimes, the difficulties in regulating the water industry through pricing, and the importance of involving the public in rate design. The collection also includes papers that give a wide empirical overview of price reforms in this sector.

Economic Principles and Concepts as Applied to Municipal Water Utilities
Final Report to the Ontario Superbuild Corporation (project number SSB-018197), 2002.
GeoEconomics Associates Inc.

Presents some economic principles and concepts that are applicable to municipal water servicing. Sketches the essential aspects of markets for water services. Then outlines the theory of water pricing and suggests alternative organizational, ownership and management arrangements for municipal water utilities. Applies the above principles and concepts to the Ontario’s water servicing market.

Final Determinations: Future Water and Sewerage Charges 2000-05: Periodic Review 1999
November 1999.
OFWAT

Describes customer priorities in U.K., profiles customer bills, describes prices’ affects on bills and profitability, and profiles charges.

Explanatory Notes on Key Topics in the Regulation of Water and Sanitation Services
Water Supply and Sanitation Sector Board Discussion Paper Series, Paper No. 6, June, 2006.
Groom, Eric, Jonathan Halpern, and David Ehrhardt

Provides an integrated view of regulatory functions and the principles and practice underlying the design of regulatory systems in the water supply and sanitation (WSS)sector. Additionally, it provides a brief analysis of consistent approaches to resetting tariffs for WSS services.

Other References

Natural Monopoly Regulation: Principles and Practice
Cambridge Surveys of Economic Literature Series, Cambridge University Press, 1988.
Berg, Sanford V., and John Tschirhart

Provides a technical economic description of pricing issues.

Pricing in Competitive Electricity Markets
Boston: Kluwer, 2000.
Faruqui, A., and K. Eakin

Provides technical analyses of various pricing issues in electricity, including consumer responses, effects of market design, risk management, and energy derivatives.

Key Words

Efficiency, Price structure, Rate structure, Marginal cost pricing, Marginal cost, Multi-part tariffs, Ramsey pricing, Two-part tariffs, Externalities, Class cost of service, Objectives

 

Case Studies

Jamaica Public Service Company Limited Tariff Review for Period 2009-2014
September 2009.
Office of Utilities Regulation (OUR)

Economic Principles and Concepts as Applied to Municipal Water Utilities
Final Report to the Ontario Superbuild Corporation (project number SSB-018197), 2002.
GeoEconomics Associates Inc.

Electricity Tariff Structure Review: Alternative Tariff Structures: A Consultation Paper
CER/04/239, July 1, 2004.
NERA

Marginal Cost of Electricity Service Study
CER/04/240, July 1, 2004.
NERA

Final Determinations. Future Water and Sewerage Charges 2000-05: Periodic Review 1999
November 1999.
OFWAT

Setting water and sewerage price limits for 2005-10: Framework and Approach
Periodic Review 2004. March 2003.
OFWAT

Decision for Approving the Regulation for the Realization of the Top-down Long Run Incremental Costing Model by Mobifon S.A.
18 December 2003.
Romanian National Regulatory Authority for Communications

Pricing Energy in Developing Countries
June 2001.
World Energy Council