NWG Network Access Tariffs: Conceptual Analysis of ''Access Pricing'' in the UK Water Industry
1 March 2000
By Drs. William Baker and Richard Hern
This report was commissioned by Northumbrian Water Group (NWG). The study was motivated by the Competition Act 1998 (CA 1998), which will come into force in the UK in March 2000. It looks at the issues that arise in setting facilities' access prices in a regulated and vertically integrated industry with substantial joint and common costs, and where protection of social obligations is of primary concern, during a phase of transition to more open access arrangements, with an uncertain end-point.
The CA 1998 has been interpreted by some, and in particular the water regulator (DGWS) who also has duties as a regulator under CA 1998, as requiring the establishment of access arrangements in the water sector by making it an offence for an appointed undertaker to refuse competing suppliers access to at least some parts of its supply chain. Such access must be provided at "economically efficient prices." The purpose of this study is to consider the conceptual basis for charges for access to UK water company facilities.
Application of economic theory and examination of precedents leads us to conclude that different methodologies for setting access charges are appropriate in different circumstances. The appropriate pricing methodology will depend, among other things, on the structure of the industry, social objectives and the availability of appropriate data and information of both companies and regulatory authorities.
This paper evaluates the principles that prices should be centred on Long Run Marginal (or "Incremental") Cost (LRMC), or alternatively on existing retail tariffs through the Efficient Components Pricing Rule (ECPR) -- bearing in mind that any practical application may blend features of both.
