Price and Profit Regulation in Developing and Transition Economies, Methods Used and Problems Faced: A Survey of the Regulators

Rate of return or cost of service regulation was the traditional means by which governments, especially in the USA, regulated profitability and prices in privately-owned public utility businesses. However, rate of return regulation was associated with efficiency disincentives. Hence, in 1983 Professor Stephen Littlechild recommended the use of a price cap to regulate British Telecom when it was privatised. Price caps were later introduced for other privatised utilities in the UK, namely gas, airports, water, electricity and the railways. Similarly, other countries that privatised their utility sectors in the 1980s and 1990s often introduced price cap regimes. This paper reports the results of a questionnaire survey of the methods used to regulate profits and prices in privatised utility sectors in a sample of developing and transition economies. In addition to providing an insight into the different methods used in these economies, the questionnaire focuses on the difficulties that their regulators perceive in operating profit and price regulation regimes.