Incentive based regulation of water supply under tariffs limitation

Abstract

The article browses methods of natural monopolies tariff regulation, applied in Russian Federation and foreign countries for the case of water supply. Three principles for natural monopolies tariff regulation are identified: compromise, compensatory, and Incentive based regulation. One of the Incentive based regulation methods — Yardstick Cost Method — has an advantage of regulated entities labor saving within the tariff protection. The other benefit of the method is the feasibility to grade providers from most to least economic performance and to regulate the economic performance improvement for ineffective providers specifically. Benchmarking of publicly available water supply costs data turned up that the costs of physical resources, amortization and rentals depend on specific conditions of enterprise. Therefore, the water supply costs exclusive of resource cost, amortization and rentals seems to be good as an outcome variable for Yardstick Cost Method. We calculated a formula of approximate functional relationship among three contributors and water supply costs exclusive of resource cost and amortization. The yardstick water supply costs were determined by target performance method applying the formula. Although the formula needs an upgrade, our calculations demonstrate a feasibility of Yardstick Cost Method practice for tariff regulation of Russian water suppliers.