Core References

• Understanding Regulation: Theory, Strategy, and Practice New York: Oxford University Press, 1999, Chapters 15, 17, and 18. Baldwin, Robert, and Martin Cave

  Discusses need for revenue to cover total cost. Describes rate of return regulation, price cap regulation using RPI-X, issues of excess returns, profit sharing approaches, error corrections, benchmarking, and yardstick regulation.

• Comparison of Building Block and Index-based Approaches paper prepared for the Utility Regulators Forum, Australian Competition and Consumer Commission, 2002. Farrier Swier Consulting

  Examines price cap and revenue cap regulation in Australia, focusing on efficiency incentives, risk, robustness, transparency, simplicity, administration, and cost and availability of information required. Considers whether regulators should incorporate utility-specific factors, benchmarking, and appropriateness to statutory objectives.

• Managing the Regulatory Process: Design, Concepts, Issues, and the Latin America and Caribbean Story Washington, D.C.: The World Bank Group, 1999, Chapter 5. Guasch, J. Luis, and Pablo Spiller

  Summarizes rate of return regulation, earnings sharing, price caps, revenue caps, and yardsticks. Discusses U.K. case for electricity and telecommunications.

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

  Describes traditional rate of return regulation for the U.S.

• Principles of Price Cap Regulation in Infrastructure Regulation and Market Reform: Principles and Practice, edited by Margaret Arblaster and Mark Jamison. Canberra, Australia: ACCC and PURC, 1998, pp. 46-54. King, S.

  Explains that a price cap simply sets a maximum allowed inter-temporal path for the price of a specific product. The rules for the path are set in advance and only depend on factors that are beyond the control of the regulated firm. Finds that in practice, however, price caps tend to be more complex because firms produce multiple products and these products may be bundled together in the price cap, the price cap may automatically adjust for exogenous changes in specific prices that have strong implications for the profitability of the regulated firm, and price regulation may have associated regulation covering service quality. Explains that a variety of forms of price cap are used when a regulated firm produces multiple products, such as fixed weight price cap, average revenue regulation (current quantities), average revenue regulation (lagged quantities), and tariff basket regulation.

Sectoral References

ELECTRICITY

• Resetting Price Controls for Privatized Utilities: A Manual for Regulators Washington, D.C.: World Bank, 1999, Chapter 2. Green, Richard, and Martin Rodriguez Pardina

  Describes two major kinds of price control, namely price baskets and revenue yield controls. Describes how price baskets (price caps) allow a firm to charge more efficient prices by increasing some prices by more than the allowed average provided that others are increased by a lesser amount. Explains use of weights and two-part tariffs. Describes revenue control, which does not require the regulator to specify a list of prices, which may not be possible if the set of prices is complex. States that pass-through terms may be included in a price control if the firm faces significant costs that are both uncertain and outside its control, and if consumers can better bear the risk than can the firm. Mathematical formulae for both price basket and revenue yield controls are specified.

TELECOMMUNICATIONS

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

  Describes different approaches for regulating telecommunications prices, including discretionary price setting, rate of return regulation, rate of return-incentive regulation (banded rate of return, rate case moratoria and earnings sharing), and price cap regulation.

• Designing Incentive Regulation for the Telecommunications Industry Cambridge, MA: MIT Press, 1996, Chapters 1 and 3. Sappington, David E.M., and Dennis L. Weisman

  Describes advantages and disadvantages of price cap regulation and rate of return regulation.

TRANSPORTATION

• Transport Policies for the Euro-Mediterranean Free-Trade Area: An Agenda for Multimodal Transport Reform in the Southern Mediterranean World Bank, Washington, D.C., 2007. Muller-Jentsch, Daniel

  Maps out national and cross-border policy reforms that would be needed to create a 'common transport space' that spans both sides of the Mediterranean sea. Benchmarks against international best practice; and draws lessons from the EU-internal reform experience in the transport sector.

• Best Methods of Railway Restructuring and Privatization CFS Discussion Paper Series, number 11, World Bank, Washington, D.C., 1995. Kopicki, Ron and Louis Thompson

  Focuses on "best" methods built on seven case studies of recent railway restructuring efforts. The case studies cover Japan National Railway, New Zealand Railways, Argentina Railways, Swedish Railways, British Railways, and railroads in the United States, and Canadian Railways.

• Privatization and Regulation of Transport Infrastructure: Guidelines for Policymakers and Regulators World Bank Institute Development Study, World Bank, Washington, D.C., 2000. Estache, Antonio

  Discusses privatization and regulation trends, price and quality regulation issues that characterize the sector, and performance indicators that the sector's regulators should be able to rely on to be effective in their jobs.

• Rate-of-Return and Price-Cap Regulations for Urban Railways Osaka University, The Institute Of Social And Economic Research(I.S .E.R.), 6-1 Mihogaoka Ibaraki Osaka 567 Japan 1997. Kidokoro, Y.

  Using a simple model of commuter railways where congestion exists, shows that price cap regulation causes congestion compared to rate-of-return regulation, shows the following results: (i) price cap regulation, in which the cap is made contingent on congestion, can correct the congestion without distorting cost-reducing efforts, (ii) price cap regulation, in which the cap depends on investment in transportation capacity, can also correct the congestion but distorts cost-reducing efforts.

WATER

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

  Describes incentives for efficiency in Ofwat’s price cap system and how the benefits are passed on to customers.

• Tariff Setting Guidelines: A Reduced Discretion Approach for Regulators of Water and Sanitation Services Public-Private Infrastructure Advisory Facility (PPIAF), Working Paper no. 8, 2009. Shugart, Chris and Ian Alexander

  Provides specific guidelines for tariff setting for water and sanitation services, in addition to describing basic principles. Addresses price reviews, allowed revenue, appropriate amounts for operating expenses, valuing regulatory assets, foreign exchange adjustments, cost of capital, capital maintenance charges, capital expenditures, and extraordinary reviews.

Key Words

Incentive regulation, Efficiency, Rate of return, Cost of service, Price, Price cap regulation, Benchmarking, Revenue caps, Price basket controls, RPI-X, Yardstick regulation, Service quality, Rate base