Summary

In summary, several situations have been identified where the operator’s preferences and the government’s preferences coincide with respect to tariff design. These include pricing in a competitive environment, Ramsey pricing for services that are subject to similar competitive pressures, multi-part prices, optional tariffs, and non-linear tariffs. With respect to these if the interests of the government and the operator are in alignment, the government can do no better than to let the operator use its superior knowledge of its abilities and of the market to choose efficient pricing arrangements. Situations where it may be beneficial for the government to intervene in pricing also have been identified. These situations include pricing for the poor, controlling undue price discrimination, tariff design for services that are subject to different levels of competitive pressure, and the speed of transition to efficient pricing. Access prices charged to rivals are not noted in this section. Market Structure and Competition covers access prices.

Finally, it is important to review the cost basis for pricing. Most of the price issues noted above relate prices to marginal cost and demand. Marginal cost is an economic concept, so to the extent that regulators need cost information for efficiency purposes, the regulator needs information on economic costs.¹ Another approach to measuring costs – called fully distributed costs – is also used in regulation, but primarily in situations where the regulator wants to limit the earnings of the operator for a specific set of services. This is called accounting separation and is described in Ring Fencing and Control of Cross-Subsidization.

Footnotes

1. Regulators use current cost asset valuation when estimating economic costs. The references section for Basic Financial Statements and Asset Valuation Techniques review asset valuation.