session objectives
Download
Skip this Video
Download Presentation
Session Objectives

Loading in 2 Seconds...

play fullscreen
1 / 16

Session Objectives - PowerPoint PPT Presentation


  • 175 Views
  • Uploaded on

Session Objectives. Rate-of-return regulation Revenue requirements Rate base Rate of return Expenses Price caps Other cost models. Quality of Service Regulation. The supplier usually exercises initiatives. Acts to recover costs Expands rate-base Avoids public criticism

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Session Objectives' - issac


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
session objectives
Session Objectives
  • Rate-of-return regulation
    • Revenue requirements
    • Rate base
    • Rate of return
    • Expenses
  • Price caps
  • Other cost models

TLMN 602.9040 Fall 1999 Session 5

quality of service regulation
Quality of Service Regulation
  • The supplier usually exercises initiatives.
    • Acts to recover costs
    • Expands rate-base
    • Avoids public criticism
  • The regulator usually imposes constraints.
    • Sets minimum standards
    • Requires resolution of customer complaints
    • Requires non-compensatory services (e.g., “lifeline”)

TLMN 602.9040 Fall 1999 Session 5

the unregulated monopoly problem
The Unregulated Monopoly Problem
  • From Session 2:
    • Prices above competitive levels
    • Output below competitive levels
    • Therefore, wealth transferred from consumers to producers
  • Must impose rate regulation to fix the problem

TLMN 602.9040 Fall 1999 Session 5

goals of rate regulation
Goals of Rate Regulation
  • Emulate competitive mix of price, output, and profits
  • Fair prices to customers
    • Price = Money/unit (of quantity or quality)
  • Avoid destructive competition
  • Control price inflation
  • Allow enough earnings to stay in business

TLMN 602.9040 Fall 1999 Session 5

revenue requirements
Revenue Requirements

R = E + B  r, where

R = revenue requirement

E = operating expense (including depreciation)

B = rate base (i.e., capital investment)

r = rate of return on investment (i.e., cost of both debt and equity capital)

Carriers tend to inflate both E and B.

Difficult to set r

TLMN 602.9040 Fall 1999 Session 5

price mix
Price Mix
  • For a multi-product firm, also

R = pi vi, i = 1,2,…n (subscript i), where

p = price of the ith product

v = volume of the ith product

n = number of products

TLMN 602.9040 Fall 1999 Session 5

rate base method of valuation
Rate Base: Method of Valuation
  • Set by method?
    • Reproduction cost (best for company)
    • Original investment, i.e., book value (best for regulator and consumer; ascertainable, at least)
    • “Fair value” (some combination)
  • Or by end results?
    • Maintain financial integrity
    • Attract capital
    • Compensate investor risk
    • Provide acceptable service

TLMN 602.9040 Fall 1999 Session 5

rate base property included
Rate Base: Property Included
  • Assets used for production
  • Assets under construction (pre- or post- approval)
    • Construction work in progress (CWIP)
    • Allowance for funds used during construction (AFUDC)
  • Cancelled plants and excess capacity
    • May be disallowed as
      • Imprudent
      • Not used and useful
    • May be allowed in part

TLMN 602.9040 Fall 1999 Session 5

expenses depreciation
Expenses: Depreciation
  • Proper depreciation rate
    • Linear?
    • Accelerated (creates low-tax windfall)?
  • Effect on tax expense (number games)
  • Original or reproduction cost? (i.e., may cost $2 million today to replace a $1 million switch bought 15 years ago.)
  • Charging full depreciation and cost of capital implies “full-cost” pricing, not “marginal-cost”

TLMN 602.9040 Fall 1999 Session 5

rate of return
Rate of Return
  • Commission mediates between investor interest and consumer interest
  • No “right” answer-- “zone of reasonableness”
    • Minimum needed to attract capital
    • Maximum is what traffic will bear.
    • Sooner or later, must recover “full cost” instead of short-term marginal cost

TLMN 602.9040 Fall 1999 Session 5

cost of capital
Cost of Capital
  • Whose cost? The firm’s or the industry’s?
    • Allow incentive for efficiency and innovation
  • Cost when? Then or now?
  • Or stock’s earnings/price ratio?
    • But these are estimated future earnings!
  • Sensitive to capital mix, because interest is deductible but ROE is taxable
  • By earnings of non-regulated industry at comparable risk?

TLMN 602.9040 Fall 1999 Session 5

operating costs
Operating Costs
  • May disallow
    • Exaggerated costs
    • Too rapid depreciation
    • Extravagance
      • In advertising and public relations
      • Charities
      • Large management salaries and expense accounts
    • Inflated equipment prices from affiliated suppliers
    • “Gold-plating”
  • Uniform System of Accounts as basis of expenses

TLMN 602.9040 Fall 1999 Session 5

price caps transition to competition
Price Caps: Transition to Competition
  • Initially set prices to yield fair estimated return on equity, ROE, e.g., 13.5%
  • Thereafter, cap prices each year for svc “baskets”
    • Allow economy’s inflation rate
    • Disallow differential telco prod’vy gain & input drops
      • Reacts on rates and forces productivity
    • Allow miscellaneous adjustment(s)
  • If actual ROE exceeds fair ROE,
    • Carrier may keep part as incentive
    • Subscribers may get part as rebate

TLMN 602.9040 Fall 1999 Session 5

price cap example
Price Cap Example

PCI(n) = PCI(n-1)(1 + s - p + m) where

PCI(n) = price cap index for year n

s = percent price inflation

p´ = percent telco inflation offset

m = percent miscellaneous adjustment

Require actual price index PCI(n), for year n

Example of values

PCI(n) = PCI(n-1)(1 - 3.0%)

for s = 2..0%, p = 5.3%, m = 0.3%

TLMN 602.9040 Fall 1999 Session 5

gdp changes in general
GDP Changes in General

G = SV = SPF = where

G = gross domestic product

S = price of “average” product

V = volume of “average” product

P = V/F = total factor productivity

F = total input factors of production

d ln G = d ln S + d ln P + d ln F, or

dG/G = dS/S + dP/P + dF/F or, as percent increases,

g = s + p + f and s = g - p - f

TLMN 602.9040 Fall 1999 Session 5

other cost models
Other Cost Models
  • Total element long range incremental cost (TELRIC)
    • Cost of a hypothetical, state-of-the-art local service network
    • Results in lower cost than actual network
  • Hybrid Cost Proxy Model
    • A model based on engineering detail and costs
    • Know that it exists, but skip details.

TLMN 602.9040 Fall 1999 Session 5

ad