Sustainability of Firms and Prices

Abstract

Previous chapters explain that liberalization of utility markets can increase the complexity of the regulator’s job. This is particularly true with respect to regulating prices. As Chapter 4 explains, there is an inherent conflict between competitive processes and some of the traditional approaches to protecting against cross-subsidy. For example, regulators often protect against anti-competitive cross-subsidy by establishing price floors for competitive services. Regulators typically base these price floors on incremental costs, so each price floor requires a cost study. With this approach, opening more markets to competition increases, rather than decreases, the work the regulator has to do. Also, as Berg and Weisman (1992, p. 453) state, pricing below incremental cost at certain times can be a perfectly legitimate business practice, but the price floors prevent this from happening.