3. Principles for determining the X-factor, including total factor productivity approach and earnings forecasting approach:
- Demand and revenue forecasting
- Estimation and forecasting of costs
- Present value calculations: cost based versus value based
Core References
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How to Determine the X in RPI - X Regulation: A User's Guide
Telecommunications Policy 24(1): February 2000, pp. 63-68.
Explains that if the regulated firm were just like the typical firm in a competitive economy, competition would limit the rate of growth of the firm's prices to the economy-wide rate of price inflation. As a result, the X-factor should reflect the extent to which: (1) the regulated firm is capable of increasing its productivity more rapidly than are other firms in the economy; and (2) the prices of inputs employed by the regulated firm grow less rapidly than do the input prices faced by other firms in the economy.
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A Primer on Efficiency Measurement for Utilities and Transport Regulators
Washington, D.C.: World Bank Group, 2003.
Describes the tools used for measuring efficiency. Considers total factor productivity measures, frontier analysis, and data concerns. Describes how these measures are incorporated into X-factors.
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Resetting Price Controls for Privatized Utilities: A Manual for Regulators
Washington, D.C.: World Bank, 1999, Chapters 5-8.
Holds that the regulator should construct a model to predict the company’s revenues given a price control, using price elasticities of demand to predict how price changes will affect quantity demanded. Describes how the regulator can then transform a revenue requirement into a price control. Considers sales predictions, past and future projected operating costs, ongoing controllable costs, ongoing uncontrollable costs, one-off costs, role of benchmarking or yardstick competition, cost- and value-based approaches to present value calculations, cash-flow-based formula for present value calculations, and the timing of payments and receipts.
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Assessing Capital Values at the Periodic Review. A consultation paper on the framework for reflecting reasonable returns on capital in price limits.
November 1992.
Describes how asset values affect price cap parameters.
Key Words
Price cap regulation, RPI-X regulation, Forecasting, Price review, Revenue, Pricing, Costs, Benchmarking