If effective competition is not possible in wholesale or retail markets, it may be necessary to regulate the prices dominant firms can charge. Without price regulation, dominant firms can increase prices above competitive levels, harming their customers.
This section of the toolkit covers key issues in regulating prices:
- The justification for ex ante price regulation – why regulate prices?
- Economic and accounting approaches to measuring costs,
- Determining the structure and level of regulated prices,
- Benchmarking prices,
- Methods of price regulation, specifically rate of return regulation and incentive regulation,
- The relative merits of rate of return regulation versus price caps,
- Issues in implementing price caps, including defining the basket(s), assessing price variations, calculating the efficiency factor, and incorporating service quality and exogenous costs, and
- Double price caps.
In addition, this section provides an overview of economic concepts that are particularly relevant to price regulation, and key pricing principles.
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