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© 2023 International Monetary Fund
WP/23/118
IMF Working Paper
Fiscal Affairs Department
The Distributional and Fiscal Implications of Public Utility Pricing
Prepared by David Coady, Samir Jahan, Fabiana Machado, and Mengfei Gu
Authorized for distribution by Rodrigo Cerda
June 2023
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
ABSTRACT: The setting of public utility prices involves balancing various competing government policy objectives, from equity concerns to ensuring the financial sustainability of providers and balancing public finances. In practice, public utility pricing often departs significantly from government objectives and tends to be characterized by unnecessarily complex price schedules, below cost-recovery tariff rates, and sectoral inefficiencies that contribute to large fiscal costs. Countries commonly embark on utility pricing reform in response to these heavy fiscal pressures. The paper discusses various reform options available to governments, with a focus on residential pricing schedules, highlighting their fiscal, financial, redistributive, and efficiency implications.
RECOMMENDED CITATION: David Coady, Samir Jahan, Fabiana Machado, and Mengfei Gu, “The Distributional and Fiscal Implications of Public Utility Pricing”, IMF Working Papers 2023/118 (Washington: International Monetary Fund).
| JEL Classification Numbers: | H21 H23 H54 L94 Q41 |
| Keywords: | Public utility pricing; efficiency; equity; fiscal sustainability; subsidy reform |
| Author’s E-Mail Address: | Dcoady300661@gmail.com; SJahan2@imf.org; FMachado@imf.org; MGu@imf.org |
| JEL Classification Numbers: | H21 H23 H54 L94 Q41 |
| Keywords: | Public utility pricing; efficiency; equity; fiscal sustainability; subsidy reform |
| Author’s E-Mail Address: | Dcoady300661@gmail.com; SJahan2@imf.org; FMachado@imf.org; MGu@imf.org |
Title Page
WORKING PAPERS
The Distributional and Fiscal Implications of Public Utility Pricing
Prepared by David Coady, Samir Jahan, Fabiana Machado, and Mengfei Gu1
Contents
I. Introduction
II. Principles of Utility Pricing
A. Economic efficiency
B. Financial sustainability
C. Equity considerations
D. Public finances
III. Utility Pricing in Practice
IV. Utility Pricing Reform Strategies
Reform 1. Scaling-up top IBT rates
Reform 2. Geographically Targeted Discounts
Reform 3. Geographically Targeted Per Capita Lump-Sum Discounts
Reform 4. Means-tested Household Lump-Sum Discounts
Reform 5. Means-tested Per Capita Lump-Sum Discounts
V. Conclusion
Appendix I. Utility Pricing and Regulation
Appendix II. Data and Analysis
Appendix III. Additional Tables and Figures
References
BOXES
1 Cost Recovery Components and Efficiency
2. Cliffhanger Effects Under Volume Differentiated Tariffs
FIGURES
1. Electricity Cost-recovery Rates in Industrial and Residential Sectors
2. Fiscal Burden of Electricity Subsidies
3. Baseline Tariff Schedule
4. Scaled-up IBT
5. Geographic Household Level Discount Scheme
6. Geographic Per Capita Discount Scheme by Welfare Decile
7. Proxy-means Test Discount Scheme
8. PMT Per Capita Discount Scheme
10. Volume Differentiated Tariffs
TABLES
1. Summary of Reforms
2. Rule for Awarding Lump-sum Discounts to Households across Locality Welfare Deciles
The authors have benefited from comments received from colleagues on earlier versions of the paper at a Fiscal Affairs Department seminar and through the IMF departmental review process. All errors and omissions remain our own.