Economics of Tariff Design. K Peter Kolf General Manager Economic Regulation Authority 18 March 2009...
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Transcript of Economics of Tariff Design. K Peter Kolf General Manager Economic Regulation Authority 18 March 2009...
Economics of Tariff Design
• K Peter Kolf• General Manager• Economic Regulation Authority
• 18 March 2009
Economic of Tariff Design
Introduction
Consider issues in rate design:
Economic
Equity
Administrative
Conclusions
Tariff setting:• requires a global perspective;• involves economic and other considerations;• requires the resolution of seemingly conflicting objectives;
in essence, is about the optimal allocation of joint costs and the impact of that allocation on consumer behaviour
Cost Objective
Minimise:
TC = f(C, E, Q, P, …)
Subject to:• Specified level of security• Min service standards• Min return on investment• Max long term interests of consumers
C: New Connections
E: Total existing connections
Q: Total demand for water
P: Peak load requirement
T: Time of useS: Seasonal
Cost and Revenue
Simply:
TC = c1C + c2E + c3Q + c4P + Revenue:
TR = p1C + p2E + p3Q + p4PResidential Tariff
AR = f(E, Q, P) C: New Connections
E: Total existing connections
Q: Total demand for water
P: Peak load requirement
Economic Objective
Maximise:
U = f(Q)
Subject to:
P.Q = y
Optimum:
Price is inversely related to price elasticities
Surplus
MC
AR
Price
Quantity
p
q
Consumer Surplus
P.q = Total Revenue
Producer Surplus
Total Cost
AR
MR
Price
Quantity
Maximising ProfitInclining Marginal Cost
π > 0
MC
AC
q1
P1
C1
Dead Weight Loss
Profit
-500
-400
-300
-200
-100
0
100
200
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35
Profit
ACMC
AR
Price
Quantity
Declining Marginal Cost
P
q
C1
π < 0
Average Cost Pricing
MC
AC
AR
Price
Quantity
Pπ=0
q π=0
Dead Weight Loss
q
P
Connections
q
Optimum
Max π
Long Term Interests of Consumers
Production Possibility Frontier
Continuous voting by consumers throughmarket
1 3 5 7 9
11 13 15 17 19 21 23 25 27 29 31 33
S1
S6
S11
S16
S21
S26
S31
-800
-700
-600
-500
-400
-300
-200
-100
0
100
200
100-200
0-100
-100-0
-200--100
-300--200
-400--300
-500--400
-600--500
-700--600
-800--700
Profit
q2
q1
1 3 5 7 9
11 13 15 17 19 21 23 25 27 29 31 33
1
6
11
16
21
26
31
-200
-150
-100
-50
0
50
100
150
200
150-200
100-150
50-100
0-50
-50-0
-100--50
-150--100
-200--150
Long Term Interests of Consumers
q2
q1
Tariff Blocks
MC
AR
Price
Quantity
Pπ=0
A + C = B
q1 q2
T1
A
B
CT2
Residential Water Tariff
Average Price
Quantity kL per annum
$/kL
Matters to Consider:Total revenue requirementDemand & cost functionsPrice elasticitiesPrice signalsEquityProfitability of small use households
Metro Water Cost
1.60
1.70
1.80
1.90
2.00
2.10
2.20
2.30
2.40
0 50 100 150 200 250 300 350 400 450 500 550 600 650 700 750
Consumption [kL per Annum]
Un
it C
ost
[$
per
kL
]
0.0%
3.0%
6.0%
9.0%
12.0%
15.0%
18.0%
21.0%
24.0%
% o
f U
sers
% of Users
Current Tariff Structure
Current Target Water Residential Tariff2012/13
1.60
1.70
1.80
1.90
2.00
2.10
2.20
2.30
2.40
0 50 100 150 200 250 300 350 400 450 500 550 600 650 700 750
Consumption [kL per Annum]
Un
it C
ost
[$
per
kL
]
0.0%
3.0%
6.0%
9.0%
12.0%
15.0%
18.0%
21.0%
24.0%
% o
f U
sers
Preferred Option for Water Corporation’s Perth Households: Average Cost per kL by Water Usage (as at 2012/13, Real Dollars of June 2008)
-
200
400
600
800
1,000
1,200
1,400
1,600
0 50 100 150 200 250 300 350 400 450 500 550 600 650 700 750
Water Consumption [kL per Annum]
Va
lue
[R
ea
l $
]
0.0%
3.0%
6.0%
9.0%
12.0%
15.0%
18.0%
21.0%
24.0%
Preferred Option for Water Corporation’s Perth Households:Metro Water Total Annual Bill (as at 2012/13)
Residential Water Tariff
(as at 2012/13, Real Dollars of June 2008)
Current Draft Recommendation
Fixed Charge $180.50 Fixed Charge $144.00
0-150 0.64 0-150 1.13
151-350 0.83 150-500 1.73
351-550 1.00 500 + 2.57
551-950 1.42
950 + 1.71
1.60
1.70
1.80
1.90
2.00
2.10
2.20
2.30
2.40
0 50 100 150 200 250 300 350 400 450 500 550 600 650 700 750
Consumption [kL per Annum]
Un
it C
os
t [$
pe
r k
L]
0.0%
3.0%
6.0%
9.0%
12.0%
15.0%
18.0%
21.0%
24.0%
% o
f U
se
rs
% of Users
Water Corp 1
Water Corp 2
Option 1
Option 2
Option Fixed Tariff 0 to 150 151 to 300 301 to 500 500+WC 1 189 1.110 1.550 1.550 2.000WC 2 164 1.110 1.550 2.000 2.000
1 144 1.130 1.730 1.730 2.5702 86 1.730 1.730 1.730 1.730
Options Considered
Investor Uncertainty November 2008
