Service Quality, Environmental, and Universal Access/Service Issues

In addition to addressing pricing issues, regulators address issues of service quality, environmental protection, infrastructure development, and access to services for the poor¹. An operator with market power may have an incentive to degrade retail service quality if doing so increases profits, or to degrade quality for inputs sold to competitors if doing so decreases competitive pressures.² Regulators often adopt schemes for regulating service quality to address these problems. Service quality regulation generally includes quality standards, mechanisms for monitoring quality, and penalties for not meeting the quality standards. It is less typical for the operator to receive a reward for exceeding service quality standards.

Environmental regulation is similar to service quality regulation in that it often includes standards, monitoring, and penalties or rewards. In some instances markets can be used for environmental regulation. For example, the government may issue tradable emission permits to electricity generators so that a generator that has low pollution control costs can profitably decrease its emissions and sell some portion of its permit to a generator which has higher pollution control costs. In many countries, the utility regulator does not have direct responsibility for environmental regulation. Where this is the case, the regulator generally should be aware of the country’s environmental policies and regulations because the utility regulator’s incentive mechanisms and decisions on above- or below-the-line treatment of environmental protection costs affects the operator’s incentives to cooperate in reaching the country’s environmental goals.

In some instances, the regulator may want the operator to provide services that are not commercially viable. The most common examples are infrastructure expansion and service or service access to the poor. In the case of infrastructure expansion, the regulator may desire a rapid system expansion, beyond what profit-maximizing operator in a competitive market would choose, or desire network expansion into a rural area, where customers are unwilling or unable to pay prices that would cover the cost of developing the rural infrastructure. The most common solution is a requirement in the operator license or concession contract that sets out network deployment expectations and the rewards or penalties that apply to encourage the operator to meet the expectations. Other approaches include special franchises for rural areas and subsidies for rural areas.

Policies for services to the poor generally use some combination of three basic elements – competition, service quality standards specific to services for the poor, and subsidies. Research has shown that competition provides operators with incentives to find ways to profitably provide service to the poor. For example, competition in mobile telecommunications in developing countries provided operators with an incentive to develop prepaid service, which made it possible for the poor, who are generally unable to establish credit for post-paid service, to obtain service.³ Competition among entrepreneurs who transport water from wells or streams has also increased the supply of water to the poor in some instances.

Situations also arise where services to the poor can be made affordable by offering services that are of a lower quality than services provided to wealthier customers. For example, a shared sewage system provides a lower level of service than a system that gives each customer his or her own connection, but may be more affordable for the poor than the higher quality system.

Subsidies are also a common feature of policies designed to assist the poor. These generally take the form of service or infrastructure development obligations for operators. (Infrastructure development issues are described above.) In these situations, the operator internalizes the subsidies. In other instances, the subsidies may be explicit. For example, water customers living in low-income areas of Colombia have received credits on their bills. Customers in wealthier areas had surcharges on their bills to fund the subsidies to the poorer customers. Subsidy arrangements should be approached with caution. Research has shown that traditionally higher income customers benefit more from subsidies than do poorer customers.

Footnotes

1. Quality, Social, Environmental covers service quality, environmental, and universal access and service issues.
2. Generally the operator in charge of the network for power or water would be a monopoly and so would have market power. Regulators generally focus service quality regulation on such operators.
3. Prepaid service was subsequently adopted even in markets where there was no competition.