Social Pricing and Rural Issues

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

Regulation may be desirable to address i) a difference between the objectives of the government and the operator, ii) an asymmetry of information between the government and the operator and iii) the monopoly power of the operator. Regulation is aimed at improving the utilities sector performance and to do so would strive to protect consumers from profit-maximizing monopoly operators, and operators from politically-driven decisions from the government and from competition. For instance, social objectives of the government to reach out to high-cost and low-income rural areas would contradict economic objectives of the operator to attain financial viability¹.

However, there are some cases when regulation is not necessary.

• Regulation may not be necessary when the government and the operator have similar objectives, for instance to offer service of a particular quality throughout the country at the lowest possible cost. As long as strategic objectives are aligned, regulation would be redundant with the operator’s own course of action.
• Regulation may not be necessary in a competitive environment, since competitive pressurediminishes the problems of market power. Multiple service providers would compete primarily on price, and would push these down to a level both acceptable to the operator (since price would at minimum equal marginal cost) and to the consumers who will maximize their satisfaction of value for price. Competition will also address the information asymmetry problem in revealing customer’s actual demand and the operator’s ability to be efficient².

In such cases, whilst tariff levels or structures may not need to be regulated, regulators should make sure that service providers meet basic quality standards³ and appropriately disclose service information so that customers can make an informed choice. For instance, Ofcom, the telecommunications regulator in the UK stopped regulating retail prices as of 2006 as competition was deemed to be strong enough to be self-regulating.

In addition, regulators should keep monitoring service levels and outreach so as to ensure that service providers do not “cherry-pick” their customers, i.e. that they do not compete only for the most profitable ones and abandon the less profitable ones, namely the low-income consumers in peri-urban and rural areas.

In certain cases, regulators may wish to continue regulating the overall price levels (through applying a RPI-X formula for example⁴) but leave flexibility to the operators in setting the tariff structure within this overall price cap, as long as they abide by some general principles such as non-price discrimination and equity (which requires to be precisely defined). This allows leaving maximum flexibility to service providers within the overall cap for defining their commercial policies and adapting to competitive pressures.

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 B. Back to Content
2. See Overview, Section C and Chapter 2 Section C. Back to Content
3. See question 13. Back to Content
4. See Chapter 4 Section B. Back to Content