Social Pricing and Rural Issues

Response Rating:

• Currently 1/5 Stars.
• 1
• 2
• 3
• 4
• 5

1 stars with 1 vote

Click above to rate this response.

[Response by Sophie Trémolet and Diane Binder, June 2009]

An important success factor for regulation lies in the clear division of responsibilities between regulators and policy makers. The boundaries between policy and regulatory decisions are sometimes difficult to establish. If the regulatory agency is subject to political pressure, then it may favour short-term political gains over long-term infrastructure development goals by setting low prices that would discourage further investments by private operators¹.

Whereas policy makers are in charge of defining social objectives and establishing regulatory frameworks, regulators should be responsible for translating these overall policy goals into practical rules, and verifying that those goals are effectively implemented. It is their responsibility to take into account poor consumers and to adapt the way in which the regulatory framework is implemented to improve services to them. Regulators would need to identify constraints² related to service expansion to the poor and establish alternative rules to serve the interests of those customers specifically, in cooperation with policy makers.

Areas of responsibilities for regulators to meet social objectives previously set by policy makers include:

• Translating social goals into measurable targets: regulators need to specify coverage targets for providers and apply incentives and penalties to make sure those targets are met.
• Set out tariff level and structure³: regulators need to strike a balance between three fundamental and often contradictory principles, cost recovery, equity and efficiency⁴. On the one hand, regulators are responsible to make sure that service providers are financially sustainable and that they deliver services efficiently. Tariff below costs result in poor service, asset deterioration and an inability to invest to meet growing demand. Tariffs should therefore be set at a “reasonable price⁵”⁶. On the other hand, regulators need to take into account the specific needs of poor consumers and their affordability constraints, which may result in the design of “lifeline” tariffs or other subsidised tariffs for poor customers in the way they set tariff level and payment schemes⁷, and may tend to set the lowest tariffs possible for poor consumers.
• Design alternative payment methods for the poor: regulators can allow flexible billing methods (through allowing the introduction of pre-paid meters or monthly instalments by service providers for instance) and allow for different service level in order to increase payment to providers⁸.
• Advise policy makers on setting quality standards: regulators can play a significant role in recommending adjustments to quality standards set by policy makers in order to better reflect poor consumers’ preferences. They should be willing to let operators experiment with alternative standards in order to meet the needs of customers in poor areas.
• Resolve disputes and handle poor customers’ complaints: Service providers should be first and foremost responsible for dealing with customer complaints. Regulators can address customer complaints which have not been resolved successfully by service providers. In order to reach poor customers, it might be necessary to establish specific mechanisms to deal with their complaints, as they may not be able to access existing mechanisms (which require a certain level of literacy and awareness of the existence of such mechanism).

Related Questions

• What do regulators need to do differently to tackle the needs of poor consumers?
  • What should regulators do to meet social objectives set by policy-makers?
  • Should social objectives be met through funds obtained at the national level and allocated to meet the objectives in each sector and region?
  • What are the advantages and disadvantages of creating dedicated agencies or « funds » to support the development of infrastructure services in rural areas? How should the regulator relate to such funds?
  • Are successful programs for peri-urban areas appropriate for rural areas?
  • Do higher income customers benefit more from subsidies than do poorer customers?
  • How can a regulator promote investment while keeping service prices affordable?
  • What procedures should the regulator adopt in order to balance economic and social objectives (like efficiency vs. fairness)?
  • What are the strength and limitations of lifeline rates?
  • When and why would the regulator choose not to regulate the price structure, leaving the task to the operating company?
  • In an industry where an aging network and generation capacity constraints lead to poor service delivery, to what extent should consumers contribute towards capital expansion?
  • Since rates in the water sector seldom reflect full cost recovery, how can you convince citizens to accept higher prices (given their willingness to pay)?
  • To what extent does service quality need to be the same for high and low cost areas?

Footnotes

1. See Overview Section H and Chapter 7 Section B for further information. Back to Content
2. Constraints for the poor to be granted access to utilities services include: land tenure (need of political intervention to modify this rule) or billing system (responsibility of the regulator). See question 1 for more details. Back to Content
3. Tariff structure is the number of customer classes or consumption block and the level of tariffs for each of these classes or blocks (Trémolet & Hunt 2006) Back to Content
4. Readers should refer to question 7 and 8. Back to Content
5. «Tariffs that cover the reasonable cost of providing the service, including a reasonable return on capital used, but no more.» Groom , Halpern & Ehrhardt 2006. Back to Content
6. Question 8 will elaborate on how these tariff-setting principles can actually be met. Back to Content
7. Readers should refer to Chapter 5 Section C and Question 9 on lifeline tariffs for more details. Back to Content
8. See question 13. Back to Content