TNAG-1779-FCO40-2539-Hong-Kong-international-telecommunications-1988 — Page 254

5.9.1 The basis for a new form of tariff regulation: tariff capping or "RPI-X"

Within a new competitive environment, the Government may wish to consider the advantages and disadvantages of two different types of tariff regulation. There are two main models for tariff regulation for telecommunications worldwide:

i.

ii.

Rate-of-return regulation (e.g. USA, Hong Kong).

The principle is to limit the return on invested funds to an agreed point.

Tariff capping (UK).

The limit by which some bundle of tariffs can be raised each year is set at a fixed value per year (e.g. inflation rate minus 3%).

Our review has reached two conclusions:

experience of the two systems suggests that tariff capping is the superior method.

however, the differences between the two has become blurred in the long run, suggesting that a compromise solution will emerge in several countries and should also apply in Hong Kong.

Tariff capping (through a formula such as "RPI-X" in the UK) has two advantages over the more traditional "rate-of-return" regulation method:

i.

It gives the regulated company the full benefit of any cost reductions achieved providing maximum incentives to improve efficiency

ii. It imposes far simpler data collection requirements for the

regulator; only tariffs and revenues need to be monitored; no calculation of (allowable) asset base is needed.

•

Consequently, such a method is now being considered by the FCC in the United States, following the success of its application in the UK. BAH considers that the arguments in its favour apply equally in Hong Kong, and that the public, the Government and the regulated companies would all benefit from its application.

Tariff capping (through the RPI-X formula) was introduced in the UK as a regulatory basis on the assumption that in the long term the presence of competition would make price regulation unnecessary. With its intrinsically arbitrary setting of the X factor (3%), it was considered more suited for short-to-medium term regulation, and indeed was initially introduced for a period of 5 years, (1984-1989). However, it is now expected that it will be extended over a longer period, raising the question of how X should be determined in the long run.

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