PRICE CAP WILL ENABLE LONG-TERM, FLEXIBLE AND PREDICTABLE TARIFF REGULATION

Drafting and implementing price caps to estimate regulated tariffs for of public telecommunications and postal services is one of the best achievement of sectoral units of FAS Central Office 2018

Deputy Head of FAS Anatoly Golomolzin commented: “Price cap is an advanced, stimulating tariff regulation. It is an intermediary stage for deregulating communications services. This approach enables the necessary long-tem, flexible and predictable tariff regulation”.

Price cap can be used not only in communications but also in other regulated sectors.

Price cap applies after regulated tariffs reach the level of economically justified costs in view of the standard profit. Price cap allows gaining profit from efficient costs management, or “inflation minus”.

The regulator sets the maximum (“cup”) price or tariff value for the service of a regulated company or the maximum (“cup”) value of the tariff changing index for a group of services for a new regulatory period, based on the expected inflation level and increasing efficiency of the company and the economy in general, or in other words, “inflation-Х-factor”.

Head of FAS Department for Regulating Communications and Information technologies, Elena Zaeva, pointed out: “Substantively, X–factor is an expected rate of an operator’s performance efficiency increase in general. Х-factor must stimulate operators to enhance efficiency to a particular base level in the economy in general. Otherwise stated, X–factor is a benchmarking mechanism in terms of efficient use of resources and the rates of efficiency improvement”.

Cup price advantages include such factors as financial stimulation of producers to improve efficiency, transparency and simplicity of calculating Х-factor and the cup price throughout long-term regulatory periods. Х-factor is overall estimated based on corporate data in order to obtain comparable data. The operator’s data are compared with data on the economy in general. The economy serves as the benchmark.

“The higher is the operator’s efficiency over the general economic efficiency, the lower is the Х-factor and, accordingly, the higher is a coefficient for the maximum tariff increase. Thus, companies are stimulated for performance improvement and innovative development”, added Elena Zaeva.

Price cup in tariff regulation is a mechanism that works for a competitive market, “engaging” communications operators in the market conduct conditions, that is either in the state of competition or close to it, in tariff policy setting.

Elena Zaeva concluded: “Communications operators are given the right to determine on their own the tariff changing indices within a set of services based on consumer conduct and corporate goals. The main motivation for regulating using price restrictions is, on the one hand, stimulating cost reductions, which results in increasing the profit that communications operators keep, and on the other – curbing tariff growth for consumers”.

In June 2019, FAS applied cup price to approve regulated tariffs for “Rostelecom” PJSC.